Sticky Prices as Coordination Failure

Laurence Ball and David Romer

American Economic Review, 1991, vol. 81, issue 3, 539-52

Abstract: This paper links the "coordination failure" and "menu cost" approaches to the microeconomic foundations of Keynesian macroeconomics. If a firm's desired price is increasing in others' prices, then the gain from price adjustment after a nominal shock is greater if others adjust. This "strategic complementarity" leads to multiple equilibria in the degree of rigidity. Welfare may be much higher in the equilibria with less rigidity. Thus, nominal rigidity arises from a failure to coordinate price changes. Copyright 1991 by American Economic Association.

Date: 1991
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Working Paper: Sticky Prices as Coordination Failure (1987)
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