Working Paper: NBER ID: w2327
Authors: Laurence Ball; David Romer
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.
Keywords: Nominal Rigidity; Coordination Failure; Price Adjustment
JEL Codes: E31; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| price flexibility increases (D43) | other firms adjust prices (L11) |
| failure to coordinate in price changes (D43) | nominal price rigidity (D41) |
| strategic complementarity (D10) | multiple equilibria in nominal rigidity (D59) |
| less rigidity equilibria are Pareto superior (D50) | greater economic welfare (D69) |
| degree of strategic complementarity (C72) | range of equilibrium degrees of rigidity (D50) |
| nominal shock (D80) | incentive to adjust price increases if others adjust (D43) |