DP959 Price Inertia and Production Lags
|Author(s):||Assar Lindbeck, Dennis J. Snower|
|Publication Date:||July 1994|
|Keyword(s):||New Keynesian Economics, Price Inertia, Price Rigidities, Production Lags|
|JEL(s):||D1, D43, D57, E12, E31, E32|
|Programme Areas:||Human Resources|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=959|
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.