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Sticky Prices as Coordination Failure

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  • Ball, Laurence
  • Romer, David

Abstract

This paper links the "coordination failure" and "menu cost" approaches to the microeconomic foundations of Keynesian macroeconomics. If a firm's desired price is increasing in others' prices, then the gain from price adjustment after a nominal shock is greater if others adjust. This "strategic complementarity" leads to multiple equilibria in the degree of rigidity. Welfare may be much higher in the equilibria with less rigidity. Thus, nominal rigidity arises from a failure to coordinate price changes. Copyright 1991 by American Economic Association.

Suggested Citation

  • Ball, Laurence & Romer, David, 1991. "Sticky Prices as Coordination Failure," American Economic Review, American Economic Association, vol. 81(3), pages 539-552, June.
  • Handle: RePEc:aea:aecrev:v:81:y:1991:i:3:p:539-52
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    1. Polinsky, A. Mitchell & Shavell, Steven, 1984. "The optimal use of fines and imprisonment," Journal of Public Economics, Elsevier, pages 89-99.
    2. Polinsky, A. Mitchell & Shavell, Steven, 1984. "The optimal use of fines and imprisonment," Journal of Public Economics, Elsevier, pages 89-99.
    3. Gary S. Becker, 1974. "Crime and Punishment: An Economic Approach," NBER Chapters,in: Essays in the Economics of Crime and Punishment, pages 1-54 National Bureau of Economic Research, Inc.
    4. Kaplow, Louis, 1992. "The optimal probability and magnitude of fines for acts that definitely are undesirable," International Review of Law and Economics, Elsevier, vol. 12(1), pages 3-11, March.
    5. Polinsky, Mitchell & Shavell, Steven, 1979. "The Optimal Tradeoff between the Probability and Magnitude of Fines," American Economic Review, American Economic Association, pages 880-891.
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