The Stabilization Effects of Price Flexibility in Contract-Based Models.

We Show That the Destabilizing Effects of Price Flexibility Due to the Increased Sensitivity of Contract Wages to Labor Market Tightness Depends Critically on an Arbitrary Restriction on the Information Available to Wage Settes Who Ae Negotiating Contact Renewals. If These Agents Are Put on the Same Footing As Investors and the Monetary Authorities by Being Given Access to Current Information Then Increased Price Flexibility Can Reduce the Magnitude of Economic Fluctuations in the Face of Demand Shocks. Contrary to Other Recent Papers, This Result Is Derived Completely Within a Staggered Contracts Framework.