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Price Flexibility as a Two‐dimensional Concept and the Volatility of Output
Author(s) -
Grosser Joachim
Publication year - 1998
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/1467-999x.00042
Subject(s) - economics , volatility (finance) , flexibility (engineering) , price level , monetary economics , rigidity (electromagnetism) , limit price , price fluctuation , microeconomics , lag , econometrics , financial economics , computer science , computer network , management , structural engineering , engineering
The stabilizing effect of increased price flexibility has been challenged in a series of articles. We show that it is important to distinguish between two different dimensions of flexibility. An increase in the responsiveness of the price level with respect to excess demand may both stabilize and destabilize the economy depending on whether the price level reacts with a lag or whether prices adjust immediately. Hence, the degree of price rigidity in the sense of a delayed price reaction turns out to be of crucial importance for the consequences of an increase in the responsiveness of the price level.