An Old-Keynesian Note on Destabilizing Price Flexibility

Tobin's (1975) macrodynamic model on 'recession and depression' is extended by introducing two separate adjustment rules for money wages and the price level. It turns out that sluggish prices and, under an additional assumption, also sticky wages are favourable for local stability of the long-run equilibrium, while a high degree of flexibility tends to be destabilizing. In addition, a disposition to cyclical behaviour is indicated.