1985/01/01 by George A. Akerlof, Janet L. Yellen · 10 citations
Economics, Econometrics and Finance · #Economic theories and models #Monetary Policy and Economic Impact #Economic Theory and Policy
paper · doi:10.1093/qje/100.supplement.823
openalex publication_date 1985/01/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
This paper presents a model in which insignificantly suboptimal behavior causes aggregate demand shocks to have significant real effects. The individual loss to agents with inertial price-wage behavior is second-order in terms of the parameter describing the shock, while the effect on real economic variables is first-order. Thus, significant changes in business activity can be generated by anticipated money supply changes provided that some agents are willing to engage in nonmaximizing behavior which results in small losses.