Imperfect Information and Staggered Price Setting
Johns Hopkins University - Department of Economics; National Bureau of Economic Research (NBER)
Stephen G. Cecchetti
Bank for International Settlements (BIS) - Monetary and Economic Department; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
NBER Working Paper No. w2201
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: 34working papers series
Date posted: January 26, 2007
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