4. A Theory of Rational Inflationary Inertia

Abstract

“... if there is such a thing as an economy with a rock-solid inflation rate of 40 per cent, plus or minus 2 per cent, per year, institutions would surely adapt, so that prices would be announced in catalogs and wage contracts with smooth growth paths paralleling the smooth aggregate price path. Nominal rigidity would set in about this price path in much the same form as we see around the zero inflation rate in low-inflation economies.” (Sims, 1988, p. 77)

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