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Imperfect Information and Staggered Price Setting

  • Laurence Ball
  • Stephen G. Cecchetti

Many Keynesian macroeconomic models are based on the assumption that firms change prices at different times. This paper presents an explanation for this "staggered" price setting. We develop a model in which firms have imperfect knowledge of the current state of the economy and gain information by observing the prices set by others. This gives each firm an incentive to set its price shortly after as many firms as possible. Staggering can be the equilibrium outcome. In addition, the information gains can make staggering socially optimal even though it increases aggregate fluctuations.

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File URL: http://www.nber.org/papers/w2201.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2201.

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Date of creation: Mar 1987
Date of revision:
Publication status: published as American Economic Review, Vol. 78, No. 5, December 1988, pp. 999-1018
Handle: RePEc:nbr:nberwo:2201
Note: ME
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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Web page: http://www.nber.org
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  1. Laurence Ball & David Romer, 1987. "The Equilibrium and Optimal Timing of Price Changes," NBER Working Papers 2412, National Bureau of Economic Research, Inc.
  2. Ball, Laurence & Romer, David, 1989. "Are Prices Too Sticky?," The Quarterly Journal of Economics, MIT Press, vol. 104(3), pages 507-24, August.
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