Skip to main content Accessibility help
×
Home
Hostname: page-component-99c86f546-66nw2 Total loading time: 0.248 Render date: 2021-12-06T10:17:14.399Z Has data issue: true Feature Flags: { "shouldUseShareProductTool": true, "shouldUseHypothesis": true, "isUnsiloEnabled": true, "metricsAbstractViews": false, "figures": true, "newCiteModal": false, "newCitedByModal": true, "newEcommerce": true, "newUsageEvents": true }

10 - Permanent–transitory confusion: implications for monetary policy and the efficiency of the price system

Published online by Cambridge University Press:  07 October 2011

Get access

Summary

Introduction

This chapter explores the implications of the confusion between temporary and permanent changes in the relative demands for monetary policy and for the allocative efficiency of the price system. We saw in Chapter 9 that confusion between permanent and transitory changes in the level of aggregate productivity can produce the symptoms of stagflation. The confusion between permanent and transitory changes in relative prices also has implications for the allocation of resources across sectors in the economy. This is because producers usually gear their production levels to what they perceive to be permanent relative prices. Erratic monetary policy introduces transitory distortions in relative prices and makes it more difficult for producers to make accurate forecasts of the permanent values of relevant relative prices.

More generally, frequent uncertain shifts in the structure of relative demands and relative supplies make it more difficult to plan production optimally. These effects and others cannot be investigated within the framework of an aggregate model of the type presented in Chapter 9 because they work by reallocating resources across sectors. We therefore move back to a multimarket equilibrium model similar in spirit to the models presented in Chapter 6. Because the discussion here focuses on the permanent–transitory confusion rather than on the aggregate–relative confusion, however, individuals in all sectors are endowed with the same current information.

Type
Chapter
Information
Publisher: Cambridge University Press
Print publication year: 1984

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Send book to Kindle

To send this book to your Kindle, first ensure no-reply@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about sending to your Kindle.

Note you can select to send to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be sent to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

Available formats
×

Send book to Dropbox

To send content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about sending content to Dropbox.

Available formats
×

Send book to Google Drive

To send content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about sending content to Google Drive.

Available formats
×