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Strategic Complementarities and Nominal Rigidities

Philipp König and Alexander Meyer-Gohde

No SFB649DP2014-054, SFB 649 Discussion Papers from Humboldt University, Collaborative Research Center 649

Abstract: We reconsider the canonical model of price setting with menu costs by Ball and Romer (1990). Their original model exhibits multiple equilibria for nominal aggregate demand shocks of intermediate size. By abandoning Ball and Romer’s (1990) assumption that demand shocks are common knowledge among price setters, we derive a unique symmetric threshold equilibrium where agents adjust prices whenever the demand shock falls outside the thresholds. The comparative statics of this threshold may differ from the one that gives rise to maximal nominal rigidity examined by Ball and Romer (1990). In contrast to their analysis, we find that a decrease in real rigidities can be associated with an increase in nominal rigidities due to the endogenous adjustment of agents’ beliefs regarding the aggregate price level.

Keywords: menu costs; global games (search for similar items in EconPapers)
JEL-codes: E31 C70 D82 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2014-10
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