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Sticky Prices as Coordination Failure

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Author Info
Laurence Ball
David Romer

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Abstract

This paper shows that nominal price rigidity can arise from a failure to coordinate price changes. If a firm's desired price is increasing in others' prices, then the gains to the firm from adjusting its price after a nominal shock are greater if others adjust. This "strategic complementarity" in price adjustment can lead to multiple equilibria in the degree of nominal rigidity. Welfare may be much higher in the equilibria with less rigidity. In addition, with multiple equilibrium degrees of rigidity, the economy may have several short-run equilibria but a unique long-run equilibrium.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2327.

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Date of creation: Jul 1987
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Handle: RePEc:nbr:nberwo:2327

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This page was last updated on 2009-12-8.

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