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Are Prices Too Sticky?

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  • Ball, Laurence
  • Romer, David

Abstract

Nominal price rigidity has a negative externality: rigidity in one firm's price increases the variability of aggregate real spending, which harms all firms. This paper investigates whether this externality is large, which would imply that stabilization policy can be highly beneficial even if the costs of making prices flexible are small. There are three conclusions. First, both the private cost of price rigidity and the externality are second order in the size of fluctuations. Second, the externality can nonetheless be arbitrarily large. Third, in a simple model, the externality is small for plausible parameter values. Copyright 1989, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 104 (1989)
Issue (Month): 3 (August)
Pages: 507-24

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Handle: RePEc:tpr:qjecon:v:104:y:1989:i:3:p:507-24

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  1. J. Bradford DeLong & Lawrence H. Summers, 1986. "The Changing Cyclical Variability of Economic Activity in the United States," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages 679-734 National Bureau of Economic Research, Inc.
  2. Ball, Laurence Markham, 1987. "Externalities from Contract Length," American Economic Review, American Economic Association, vol. 77(4), pages 615-29, September.
  3. Martin L. Weitzman, 1986. "Macroeconomic Implications Of Profit Sharing," NBER Chapters, in: NBER Macroeconomics Annual 1986, Volume 1, pages 291-354 National Bureau of Economic Research, Inc.
  4. Martin L. Weitzman, 1984. "The Simple Macroeconomics of Profit Sharing," Working papers 357, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Akerlof, George A & Yellen, Janet L, 1985. "A Near-rational Model of the Business Cycle, with Wage and Price Intertia," The Quarterly Journal of Economics, MIT Press, vol. 100(5), pages 823-38, Supp..
  6. Stephen Zeldes, . "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," Rodney L. White Center for Financial Research Working Papers 20-86, Wharton School Rodney L. White Center for Financial Research.
  7. Mankiw, N Gregory, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model," The Quarterly Journal of Economics, MIT Press, vol. 100(2), pages 529-38, May.
  8. Kuran, Timur, 1986. "Price Adjustment Costs, Anticipated Inflation, and Output," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 407-18, May.
  9. Schultze, Charles L, 1985. "Microeconomic Efficiency and Nominal Wage Stickiness," American Economic Review, American Economic Association, vol. 75(1), pages 1-15, March.
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