NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Harumi Ito

Department of Economics
Brown University, Box B
Providence, RI 02912
Tel: 401/863-2887
Fax: 401/863-1970

E-Mail: no email available

NBER Working Papers and Publications

June 1999Sticky Prices, Coordination and Collusion
with John C. Driscoll: w7165
New Keynesian models of price setting under monopolistic competition involve two kinds of inefficiency: the price level is too high because firms ignore an aggregate demand externality, and when there are costs of changing prices, price stickiness may be an equilibrium response to changes in nominal money even when all agents would be better off if all adjusted prices. This paper models the consequences of allowing firms to coordinate, enforcing the coordination by punishing deviators; this is equivalent to modeling firms as an implicit cartel playing a punishment game. We show that coordination can partially or fully eliminate the first kind of inefficiency, depending on the magnitude of the punishment, but cannot always remove the second. The response of prices to a monetary shock will...

Published: Driscoll, John C. and Harumi Ito. "Sticky Prices, Coordination And Enforcement," Topics in Macroeconomics, 2003, v3, Article 10.

 
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