Title

Price Flexibility and Output Stability: An Old Keynesian View

Authors

James Tobin

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.

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