The Equilibrium and Optimal Timing of Price Changes

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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)

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