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PRICE FLEXIBILITY AND AGGREGATE STABILITY: NEW EVIDENCE AND IMPLICATIONS
Author(s) -
Kandil Magda
Publication year - 1994
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1994.tb01329.x
Subject(s) - flexibility (engineering) , economics , aggregate (composite) , stability (learning theory) , shock (circulatory) , microeconomics , aggregate demand , monetary economics , econometrics , monetary policy , computer science , medicine , materials science , management , machine learning , composite material
The relation between price flexibility and aggregate real stability has been subject to recent debate. Increased price flexibility decreases the response of real output to aggregate demand shifts and, in turn, is stabilizing. The increased flexibility may exacerbate, however, the size of demand shifts induced by a given underlying shock. If the latter channel dominates, increased flexibility may prove destabilizing. This paper examines the real effects of specific shocks underlying aggregate demand across a group of eighteen major industrial countries. The stabilizing effect of price flexibility appears to dominate.