Sticky Prices as Coordination Failure

Laurence Ball and David Romer

No 2327, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper shows that nominal price rigidity can arise from a failure to coordinate price changes. If a firm's desired price is increasing in others' prices, then the gains to the firm from adjusting its price after a nominal shock are greater if others adjust. This "strategic complementarity" in price adjustment can lead to multiple equilibria in the degree of nominal rigidity. Welfare may be much higher in the equilibria with less rigidity. In addition, with multiple equilibrium degrees of rigidity, the economy may have several short-run equilibria but a unique long-run equilibrium.

Date: 1987-07
Note: EFG
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Published as American Economic Review, Vol. 81, No. 3, pp. 539-552, June 1991.

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