The Equilibrium and Optimal Timing of Price Changes
NBER Working Paper No. 2412 (Also Reprint No. r1329)
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.
Published: Review of Economic Studies, Vol. 56 (2), No. 186, pp. 179-198, (April 1989)