Assar Lindbeck () and Dennis J. Snower
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Assar Lindbeck: Research Institute of Industrial Economics (IFN)
Dennis J. Snower: Birkbeck College and University of London
Abstract: The paper shows how prolonged price inertia can arise in a macroeconomic system in which there are temporary price rigidities as well as production lags in the use of intermediate goods. In this context, changes in production demand - generated, say, by changes in the money supply - have long-lasting price and quantity effects. Specifically, a temporary demand shift generates "persistence" in price-quantity decisions, in the sense that the price-quantity effects of this shift persist for long after the shift has disappeared. A permanent demand shift generates "sluggishness" in price-quantity decisions, in the sense that the full price effects of the shift take a long time to appear and that meanwhile quantity effects are present.
Keywords: Price-Rigidities; Price Inertia; Production Lags; New Keynesian Economics
JEL-codes: D10; D43; D57; E12; E31; E32
26 pages, March 1996
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