Working Paper: NBER ID: w2412
Authors: Laurence Ball; David Romer
Abstract: This paper studies the welfare properties of the equilibrium timing of price changes. Staggered price-setting has the advantage that it permits rapid adjustment to firm-specific shocks but the disadvantage that it causes price level inertia and therefore increases aggregate fluctuations. Because each firm ignores its contribution to inertia, staggering can be a stable equilibrium even if it is highly inefficient. In addition, there can be multiple equilibria in the timing of price changes; indeed, whenever there is an inefficient staggered equilibrium, there is also an efficient equilibrium with synchronized price-setting.
Keywords: price changes; synchronization; staggering; economic fluctuations; welfare
JEL Codes: E31; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Staggering (Y60) | price level inertia (E31) |
| price level inertia (E31) | welfare (I38) |
| Staggering (Y60) | welfare (I38) |
| Synchronization (C69) | welfare (I38) |
| Synchronization (C69) | price level inertia (E31) |
| price level inertia (E31) | economic fluctuations (E32) |
| Synchronization of price changes (P22) | aggregate fluctuations (E10) |
| Staggering (Y60) | inefficient equilibrium (D59) |
| Synchronization (C69) | equilibrium (D50) |