Are Prices Too Sticky?
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NBER Working Paper No. 2171 (Also Reprint No. r1301)
Issued in October 1989
NBER Program(s): EFG
This paper shows that small costs of changing nominal prices can lead to rigidities that cause highly inefficient fluctuations in real variables. As a result, aggregate demand stabilization can be very desirable even though the frictions that cause fluctuations in aggregate demand to have real effects are slight. Inefficient price rigidity arises because rigidity has a negative externality: rigidity in one firm's price increases the variability of real aggregate demand, which hurts all firms. The externality can be arbitrarily large relative to the private costs of rigidity.
Published: The Quarterly Journal of Economics, Vol. 104, Issue 3, pp. 507-524,(August 1989).
This paper is available as PDF (240 K) or DjVu (175 K) (Download viewer) or via email.
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