Discussion paper

DP959 Price Inertia and Production Lags

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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Citation

Snower, D and A Lindbeck (1994), ‘DP959 Price Inertia and Production Lags‘, CEPR Discussion Paper No. 959. CEPR Press, Paris & London. https://cepr.org/publications/dp959