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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.

Suggested Citation

  • Laurence Ball & David Romer, 1987. "The Equilibrium and Optimal Timing of Price Changes," NBER Working Papers 2412, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:2412
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    References listed on IDEAS

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    1. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-113, May.
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    6. Laurence Ball, 1988. "Is Equilibrium Indexation Efficient?," The Quarterly Journal of Economics, Oxford University Press, vol. 103(2), pages 299-311.
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