ANTICIPATED INFLATION AND AGGREGATE EMPLOYMENT: THE CASE OF COSTLY PRICE ADJUSTMENT

Even if inflation is perfectly anticipated, a firm that finds nominal price adjustments sufficiently costly will reset its price at multi‐period intervals. Consequently, its average output will change in a direction that depends on properties of its profit function. On the basis of this observation, which does not involve money illusion, the paper shows that anticipated inflation can stimulate aggregate employment through a process that entails changes in the factor demands of individual monopolistic firms and in the intersectoral allocation of consumer expenditure. Simulations indicate, however, that the gain in aggregate employment is likely to be modest. Copyright © 1986, Wiley Blackwell. All rights reserved

Duke Scholars

Author Timur Kuran Economics