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Discussion Paper Details

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Title: Price Inertia and Production Lags

Author(s): Assar Lindbeck and Dennis J. Snower

Publication Date: July 1994

Keyword(s): New Keynesian Economics, Price Inertia, Price Rigidities and Production Lags

Programme Area(s): Human Resources

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 product 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.

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Bibliographic Reference

Lindbeck, A and Snower, D. 1994. 'Price Inertia and Production Lags'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=959