Price Flexibility and Output Stability: An Old Keynesian View
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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.
Tobin, James, "Price Flexibility and Output Stability: An Old Keynesian View" (1991). Cowles Foundation Discussion Papers. 1237.