Coordination in Price Setting and the Zero Lower Bound: A Global Games Approach

Mitsuru Katagiri
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Mitsuru Katagiri: Bank of Japan

No 16-E-12, Bank of Japan Working Paper Series from Bank of Japan

Abstract: Abstract: In this paper, I construct a two-period general equilibrium model and describe price competition among monopolistically competitive firms as a coordination game. While the model has multiple equilibria with different levels of inflation (positive or zero), the equilibrium selection in line with global games implies that the economy with a high natural interest rate, i.e., high expected productivity growth, tends to move into the equilibrium with positive inflation. The policy analyses indicate that monetary policy measures such as an increase in the target inflation rate and a decrease in the lower bound of nominal interest rates can prevent the economy from moving into the zero inflation equilibrium even in the face of low expected productivity growth.

Keywords: Inflation Indeterminacy; Effective Lower Bound; Global Games (search for similar items in EconPapers)
JEL-codes: D82 E31 E52 (search for similar items in EconPapers)
Date: 2016-08-08
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:boj:bojwps:wp16e12

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