Sticky prices, coordination and enforcement
By: John C. Driscoll and Harumi Ito.
Contributors: Ito, Harumi.
Series: Finance and economics discussion series ;; 2003-30; Finance and economics discussion series (Online) ;; 2003-30.
Publisher: Federal Reserve Board
Published: 2003
Place of publication: Washington, D.C
Language: eng
Format: Electronic resource
Description: "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"--Federal Reserve Board web site.
Notes: Also available in print.
Includes bibliographical references.
Title from PDF file as viewed on 7/26/2004.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.