Supply Shocks, Sticky Prices, and Monetary Policy

Rotemberg, Julio J.
November 1983
Journal of Money, Credit & Banking (Ohio State University Press);Nov83, Vol. 15 Issue 4, p489
Academic Journal
This article examines how supply shocks and sticky prices impact monetary policy. Specifically, the author investigates the influence that an oil price increase has on an economy made up of firms that choose not to change their prices. The author shows that this type of inflationary price increase traditionally results in a fall in the money supply when no government action is taken. In order to maintain output stability the price of domestic goods must remain constant; therefore, in a country that imports oil, a price increase will likely result in a short recession period.


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