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Decoupling nominal and real rigidities

Philipp J. König and Alexander Meyer-Gohde

Economics Letters, 2017, vol. 156, issue C, 129-132

Abstract: We revisit Ball and Romer’s (1990) canonical model of price setting with menu costs that exhibits multiple equilibria. We show that changes to firms’ markups move nominal and real rigidities in opposite directions. Using game-theoretic tools to derive a unique equilibrium, we find that accounting for agents’ endogenous adjustment of price expectations further weakens the link between real and nominal rigidities.

Keywords: Global games; Menu costs; Sticky prices (search for similar items in EconPapers)
JEL-codes: E31 C70 D82 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:ecolet:v:156:y:2017:i:c:p:129-132