Laurence Ball, N. Gregory Mankiw, and David Romer A simple example makes clear the importance of the timing of price anges. Suppose first that every firm adjusts its price on the first of each month, so that price setting is synchronized. If the money supply falls on June 10, output is reduced from June 10 to July 1, because nominal prices are fixed during this period. But on July 1 all prices adjust in proportion to the fall in money, and the recession ends Now suppose that half of all firms set prices on the first of each month and half on the fifteenth. If the money supply falls on June 10, then on June 15 half the firms have an opportunity .o adjust their prices. But in his case they may choose to make little adjustment. Because half of all nominal prices remain fixed, adjustment of the other prices implies changes in relative prices, which firms may not want. (In contrast, if all prices change simultaneously, full nominal adjustment does not affect relative prices. If the June 15 price setters make little adjustment, then the other firms make little adjustment when their turn comes on July 1 because they do not desire relative price changes either. And so on. The price level declines slowly as the result of small decreases every first and fifteenth, and the real effects of the fall in money die out slowly. In short, price adjustment is slow because neither group of firms is willing to be the first to make large cuts. As Blanchard emphasizes, if staggering occurs among firms at differ ent points in a chain of production, its effects are strengthened. 12A I1. a natural question is why firms change prices at different times if this exacerbates aggregate fluctuations. One obvious answer is that different firms receive shocks at different times and face different costs of price adjustment. Laurence Ball and david Romer, " The Equilibrium and Optimal Timing of Price Changes, Working Paper 241 (NBER, October 1987), show that, because of externalities from staggering, idiosyncrat hocks can lead to staggering even if synchronized price setting is Pareto superior. but diosyncratic shocks cannot explain all staggering For example, some firms with two-year labor contracts set wages in even years and some set them in odd years, and this does not orrespond to deterministic two-year cycles in the arrival of shocks. Another explanatio or staggering is that it arises from firms' efforts to gain information. This source of gering is discussed in Arthur M. Okun, Prices and Quantities: A Macroeconomic Analysis(Brookings, 1981), and formalized in Laurence Ball and Stephen G, Cecchetti Imperfect Information and Staggered Price Setting, Working Paper 2201 (NBER, April 1987). For example, a firm wants to set wages in line with the wages of other firms. If all wages are set simultaneously, each firm is unsure of what wage to set because it does not know what others will do. This gives each firm an incentive to set its wage shortly after he others. The desire of each firm to"bat last, as Okun puts it, can lead in equilibrium o a uniform distribution of signing dates 12. Blanchard, "Price Asynchronization