The rigidity bias

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Title: The rigidity bias
Author: Herrala, Risto
Organization: Suomen Pankki
Series: Suomen Pankin keskustelualoitteita
Series number: 31/2003
Year of publication: 2003
Publication date: 14.11.2003
Pages: 29 s.
Keywords: makrotalous; epävarmuus; jäykkyydet; likviditeetti; mallit; hinnat; keskuspankit; kansantaloustiede; sijoitukset
Abstract: We study the basic economic problem of choice between long-term and short-term commitments under a general characterization of uncertainty (aggregate uncertainty).When contingencies are contractible, a perfect market of Arrow-Debreau contingent claims implements the social optimum.When contingencies are not contractible, long-term commitments receive too much weight in individual portfolios.The economy as a whole is too rigid during periods of high aggregate shocks.The model links a rigidity bias with the operation of the price mechanism and the monetary system. Keywords: liquidity, central banking, monetary system JEL classification numbers: G0, E0

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