Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/103799
Authors: 
König, Philipp
Meyer-Gohde, Alexander
Year of Publication: 
2014
Series/Report no.: 
SFB 649 Discussion Paper 2014-054
Abstract: 
We reconsider the canonical model of price setting with menu costs by Ball and Romer (1990). Their original model exhibits multiple equilibria for nominal aggregate demand shocks of intermediate size. By abandoning Ball and Romer's (1990) assumption that demand shocks are common knowledge among price setters, we derive a unique symmetric threshold equilibrium where agents adjust prices whenever the demand shock falls outside the thresholds. The comparative statics of this threshold may differ from the one that gives rise to maximal nominal rigidity examined by Ball and Romer (1990). In contrast to their analysis, we find that a decrease in real rigidities can be associated with an increase in nominal rigidities due to the endogenous adjustment of agents' beliefs regarding the aggregate price level.
Subjects: 
menu costs
global games
JEL: 
E31
C70
D82
Document Type: 
Working Paper

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