Malik, Hamza and Scarth, William (2005): Is Price Flexibility De-Stabilizing? A Reconsideration.
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Using a New Neoclassical Synthesis model of monetary policy for a small open economy, this paper explores the impact of an increased degree of price flexibility on output volatility. Previous analysis of this question – based on the earlier generation of descriptive macro systems with model-consistent expectations – offered mixed conclusions, especially in an open economy context. We update that literature by reconsidering the issue within models that involve optimization-based behavioural equations. We find clear support for Keynes’ concern that a higher degree of price flexibility raises output volatility – but only under flexible exchange rates. We discuss the implications of our findings for current macro policy discussions in both European and other economies.
|Item Type:||MPRA Paper|
|Original Title:||Is Price Flexibility De-Stabilizing? A Reconsideration|
|Keywords:||price flexibility; exchange rate policy; monetary policy in an open economy|
|Subjects:||E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
|Depositing User:||Hamza Malik|
|Date Deposited:||14. Oct 2006|
|Last Modified:||15. Feb 2013 23:18|
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