The Equilibrium and Optimal Timing of Price Changes
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 disadvantages that it causes unwanted fluctuations in relative prices and that, by creating price level inertia, it can increase aggregate fluctuations. Because each firm ignores its contribution to these problems, staggering can be a stable equilibrium even if it is highly inefficient. In addition, there can be multiple equilibria in the timing of prices changes; indeed, whenever there is an inefficient staggered equilibrium, there is also an efficient equilibrium with synchronized price setting. Copyright 1989 by The Review of Economic Studies Limited.
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Volume (Year): 56 (1989)
Issue (Month): 2 (April)
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
- Andrew C. Caplin & Daniel F. Spulber, 1987.
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- Gray, Jo Anna, 1978. "On Indexation and Contract Length," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 1-18, February.
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