The mis behaviour of the aggregate price level

Daniel Tsiddon*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

This paper investigates the response of the price level to random monetary shocks through a model of the fixed cost of changing a nominal price. It shows that in an inflationary environment, an expansionary monetary shock is accommodated faster than a contractionary monetary shock. Furthermore, when the average rate of monetary expansion increases, the lag in response to a positive shock decreases. The study also proves that the relationship between the expected rate of inflation and the variance of real prices is positive only above a critical level of expected inflation.

Original languageEnglish
Pages (from-to)889-902
Number of pages14
JournalReview of Economic Studies
Volume60
Issue number4
DOIs
StatePublished - Oct 1993
Externally publishedYes

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