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Re-assessing New Keynesian paradox of flexibility

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

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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.

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