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Coordination in price setting and the zero lower bound: a global games approach

Published online by Cambridge University Press:  06 August 2021

Mitsuru Katagiri
Mitsuru Katagiri*
Affiliation:
Faculty of Business Administration, Hosei University, Chiyoda City, Tokyo, Japan 102-8160
*
*Corresponding author. Email: mitsuru.katagiri@hosei.ac.jp
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Abstract

This paper constructs a two-period general equilibrium model with the effective lower bound of nominal interest rates and describes price competition among monopolistically competitive firms as a coordination game. While the model has multiple equilibria with different levels of inflation (positive or zero), the equilibrium selection in line with global games implies that the economy with high expected productivity growth moves into the positive inflation equilibrium. The policy analyses indicate that monetary policy measures such as an increase in the target inflation can prevent the economy from moving into the zero inflation equilibrium even with low productivity growth.

Keywords

Inflation indeterminacyeffective lower boundglobal gamesD82E31E52
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 2 , March 2023 , pp. 379 - 398
Copyright
© Cambridge University Press 2021

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