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Imperfect Information and Staggered Price SettingLaurence BallJohns Hopkins University - Department of Economics; National Bureau of Economic Research (NBER) Stephen G. CecchettiBank for International Settlements (BIS) - Monetary and Economic Department; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER) March 1987 NBER Working Paper No. w2201 Abstract: Many Keynesian macroeconomic models are based on the assumption that firms change prices at different times. This paper presents an explanation for this "staggered" price setting. We develop a model in which firms have imperfect knowledge of the current state of the economy and gain information by observing the prices set by others. This gives each firm an incentive to set its price shortly after as many firms as possible. Staggering can be the equilibrium outcome. In addition, the information gains can make staggering socially optimal even though it increases aggregate fluctuations.
Number of Pages in PDF File: 34 working papers seriesDate posted: January 26, 2007Suggested CitationContact Information
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