Document Type
Discussion Paper
Publication Date
10-1-1991
CFDP Number
994R
CFDP Revision Date
1992-09-01
CFDP Pages
36
Abstract
The central macroeconomic issue is the same as ever. How reliable are automatic market adjustments in maintaining full employment equilibrium in the face of aggregate demand shocks? Many modern theorists assume that nominal prices, including wages, jump instantaneously to keep supply and demand equal in all markets. No excess supply, no involuntary unemployment, can ever arise. However, since actual price adjustments take real time, greater flexibility can be destabilizing. “Real balance” effects are overrated, and the demand effects of nominal price changes are perverse. Activist macro policies are necessary, as Keynes argued, even though nominal prices are far from rigid.
Recommended Citation
Tobin, James, "Price Flexibility and Output Stability: An Old Keynesian View" (1991). Cowles Foundation Discussion Papers. 1237.
https://elischolar.library.yale.edu/cowles-discussion-paper-series/1237