Strategic complementarities and nominal rigidities

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SFB 649 Discussion Paper ; No. 2014-054

Classification and Topics

• Classification: Wirtschaft ; Price Level; Inflation; Deflation ; Game Theory and Bargaining Theory: General ; Asymmetric and Private Information; Mechanism Design
• Subject: menu costs ; global games

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): König, Philipp ; Meyer-Gohde, Alexander
• Event: Veröffentlichung
• (who): Humboldt University of Berlin, Collaborative Research Center 649 - Economic Risk
• (where): Berlin
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/103799
• Last update: 10.03.2025, 11:43 AM CET