Re-assessing New Keynesian paradox of flexibility

Kim, Minseong (2020): Re-assessing New Keynesian paradox of flexibility.

Abstract

The paradox of flexibility in a classic New Keynesian model is shown to be generated by model design choices to achieve tractability. These design choices are made only for tractability considerations and are not fundamental. Once the form of cross-demand functions faced by firms is generalized, the paradox of flexibility disappears. Sticky price and monopolistic competition themselves are insufficient to generate the paradox, and additional economic structures are needed.

• Item Type: MPRA Paper
• Language: English
• Keywords: paradox of flexibility; New Keynesian model; multiple equilibria; equilibrium selection; zero lower bound
• Subjects: B - History of Economic Thought, Methodology, and Heterodox Approaches > B2 - History of Economic Thought since 1925 > B22 - Macroeconomics; B - History of Economic Thought, Methodology, and Heterodox Approaches > B4 - Economic Methodology > B41 - Economic Methodology; E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E13 - Neoclassical; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E30 - General; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E50 - General; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E60 - General

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