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The (Mis)Behaviour of the Aggregate Price Level

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  • Daniel Tsiddon

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.

Suggested Citation

  • Daniel Tsiddon, 1993. "The (Mis)Behaviour of the Aggregate Price Level," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(4), pages 889-902.
    • Handle: RePEc:oup:restud:v:60:y:1993:i:4:p:889-902.
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    File URL: http://hdl.handle.net/10.2307/2298104
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