Are Prices Too Sticky?
This paper shows that small costs of changing nominal prices can lead to rigidities that cause highly inefficient fluctuations in real variables. As a result, aggregate demand stabilization can be very desirable even though the frictions that cause fluctuations in aggregate demand to have real effects are slight. Inefficient price rigidity arises because rigidity has a negative externality: rigidity in one firm's price increases the variability of real aggregate demand, which hurts all firms. The externality can be arbitrarily large relative to the private costs of rigidity.
|Date of creation:||Feb 1987|
|Date of revision:|
|Publication status:||published as The Quarterly Journal of Economics, Vol. 104, Issue 3, pp. 507-524,(August 1989).|
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