Does price rigidity cause large social or private costs?

Abstract

Nominal rigidity is a necessary condition for nominal disturbances to cause aggregate output fluctuations. The paper studies whether price rigidity can entail a large social welfare loss far beyond the resulting private loss in a general setting with many (endogenous) monopoly firms and a representative consumer-worker. Numerical simulation finds that the social welfare cost of rigidity is increasing in the concavity of the economy's welfare function. This positive relationship, however, cannot guarantee the social cost to dominate the private cost. Rather, the former turns out smaller than the latter for a wide range of parameter values, in contrast to most recent work. The implication is that gains from stabilization policy may be negligible.