Pre-set Prices, Differential Information and Monetary Policy

T M Andersen

Oxford Economic Papers, 1986, vol. 38, issue 3, 456-80

Abstract: This paper proves the case for an active stabilization policy by analyzi ng an economy exposed to nominal shocks, where prices are pre-set by firms posse ssing differential information. Price decisions are uncoordinated in that when e ach firm sets its price it is imperfectly informed about prices set by other fir ms. The role of a systematic monetary policy, as a means to overcome the implica tions of differential information for the allocation of economic resources, is a nalyzed. Alternatively, a private indexation scheme is also analyzed and compare d to monetary policy, which can eliminate completely the implications of differe ntial information, whereas an indexation scheme can do so only partially. Copyright 1986 by Royal Economic Society.

Date: 1986
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