Sticky Prices, Coordination and Enforcement
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John C Driscoll
Price-setting models with monopolistic competition and costs of changing prices exhibit coordination failure: in response to a monetary policy shock, individual agents lack incentives to change prices even when it would be Pareto-improving if all agents did so. The potential welfare gains are in part evaluated relative to a benchmark equilibrium of perfect, costless coordination; in practice, since agents will still have incentives to deviate from the benchmark equilibrium, coordination is likely to require enforcement. We consider an alternative benchmark equilibrium in which coordination is enforced by punishing deviators. This is formally equivalent to modeling agents as a cartel playing a punishment game. We show that this new benchmark implies that the welfare losses from coordination failure are smaller. Moreover, at the new benchmark equilibrium, prices are upwards-flexible but downwards-sticky. These last results suggest that the dynamic behavior of sticky-price models may more generally depend on the kind of imperfect competition assumed.
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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- Interpreting the Significance of the Lagged Interest Rate in Estimated Monetary Policy Rules
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- The Money Metric, Price and Quantity Aggregation and Welfare Measurement
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- Explaining Movements in the Labor Share
- Endogenous Growth with Intertemporally Dependent Preferences
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Articles in the same Issue
- Topics Article
- Balance of Payments Constrained Non-Scale Growth and the Population Puzzle
- The Human Capital Constraint: Of Increasing Returns, Education Choice and Coordination Failure
- ``To Furnish an Elastic Currency'': Banking, Aggregate Risk, and Welfare
- How Prudent are Community Representative Consumers?
- Price Distribution in a Symmetric Economy
- The Role of Stock Markets in Current Account Dynamics: a Time Series Approach
- Shiftwork, Adjustment Costs and Uncertainty
- How Do Future Constraints Affect Current Investment?
- The Politics of Endogenous Growth
- Sticky Prices, Coordination and Enforcement
- Fractional Integration with Bloomfield Disturbances in the Specification of Real Output in the G7 Countries
- Monetary Policy When the Nominal Short-Term Interest Rate is Zero
- High-Tech Human Capital: Do the Richest Countries Invest the Most?
- Substitution Elasticities and Investment Dynamics in Two-Country Business Cycle Models
- Contributions Article
- On Modeling the Effects of Inflation Shocks: Comments and Some Further Evidence
- Optimal Monetary Policy and the Correlation between Prices and Output
- Are Banking Supervisory Data Useful for Macroeconomic Forecasts?
- An Analytical Approach to the Welfare Cost of Business Cycles and the Benefit from Activist Monetary Policy
- Interpreting the Significance of the Lagged Interest Rate in Estimated Monetary Policy Rules
- Idle Capital and Long-Run Productivity
- The Money Metric, Price and Quantity Aggregation and Welfare Measurement
- Parente and Prescott's Theory May Work in Practice But Does Not Work in Theory
- Explaining Movements in the Labor Share
- Endogenous Growth with Intertemporally Dependent Preferences
- On the Friedman Rule in Search Models with Divisible Money
- Finance Causes Growth: Can We Be So Sure?
- Advances Article
- Where Is the Natural Rate? Rational Policy Mistakes and Persistent Deviations of Inflation from Target
- Downward Nominal Wage Rigidity: Evidence from the Employment Cost Index
