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The Equilibrium and Optimal Timing of Price Changes

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  • Laurence Ball
  • David Romer

Abstract

This paper studies the welfare properties of the equilibrium timing of price changes. Staggered price-setting has the advantage that it permits rapid adjustment to firm-specific shocks but the disadvantage that it causes price level inertia and therefore increases aggregate fluctuations. Because each firm ignores its contribution to inertia, staggering can be a stable equilibrium even if it is highly inefficient. In addition, there can be multiple equilibria in the timing of price changes; indeed, whenever there is an inefficient staggered equilibrium, there is also an efficient equilibrium with synchronized price-setting.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2412.

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Date of creation: Oct 1987
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Publication status: published as Review of Economic Studies, Vol. 56 (2), No. 186, pp. 179-198, (April 1989)
Handle: RePEc:nbr:nberwo:2412

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  1. Andrew C. Caplin & Daniel F. Spulber, 1987. "Menu Costs and the Neutrality of Money," NBER Working Papers 2311, National Bureau of Economic Research, Inc.
  2. Fethke, Gary & Policano, Andrew, 1984. "Wage contingencies, the pattern of negotiation and aggregate implications of alternative contract structures," Journal of Monetary Economics, Elsevier, Elsevier, vol. 14(2), pages 151-170, September.
  3. Ball, Laurence, 1988. "Is Equilibrium Indexation Efficient?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 103(2), pages 299-311, May.
  4. Mankiw, N Gregory, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(2), pages 529-38, May.
  5. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, American Economic Association, vol. 69(2), pages 108-13, May.
  6. Parkin, Michael, 1986. "The Output-Inflation Trade-off When Prices Are Costly to Change," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(1), pages 200-224, February.
  7. 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, MIT Press, vol. 100(5), pages 823-38, Supp..
  8. Gray, Jo Anna, 1978. "On Indexation and Contract Length," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(1), pages 1-18, February.
  9. Matsukawa, Shigeru, 1986. "The Equilibrium Distribution of Wage Settlements and Economic Stability," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(2), pages 415-37, June.
  10. Olivier J. Blanchard & Nobuhiro Kiyotaki, 1985. "Monopolistic Competition, Aggregate Demand Externalities and Real Effects of Nominal Money," NBER Working Papers 1770, National Bureau of Economic Research, Inc.
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