Working Paper: CEPR ID: DP1567
Authors: Huw David Dixon; Claus Thustrup Hansen
Abstract: New Keynesian literature assumes symmetric industrial structure when analysing explanations of monetary non-neutrality. We analyse the impact of modifying this assumption by allowing for a mixed industrial structure; some industries are characterized by monopolistic competition, and others by perfect competition. The mixed industrial structure implies that there is a misallocation of the input (labour) between sectors. Following a 5% monetary expansion, the menu costs required for price rigidity in the monopolistic sector can be 50 times smaller than in the symmetric case, while the ratio of welfare gain to private loss can be as large as 200 times the corresponding symmetric case. This implies that in real world economies, menu costs may be even more significant than previously thought.
Keywords: New Keynesian Economics; Industrial Structure; Menu Costs
JEL Codes: D40; E30; L16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary expansion in a mixed economy (E19) | Larger output response in the monopolistically competitive sector (L11) |
| Monetary expansion in a mixed economy (E19) | Larger output response in the perfectly competitive sector (D41) |
| Larger output response in the monopolistically competitive sector (L11) | Reduction of inefficiencies due to misallocation of inputs (D61) |
| Differences in price rigidity (L11) | Misallocation of labor between sectors (F16) |
| Misallocation of labor between sectors (F16) | Welfare effects (D69) |
| Nominal rigidity in the monopolistic sector (D42) | Welfare gains from nominal rigidity (D69) |
| Menu costs required for price rigidity in the monopolistic sector (D42) | Price rigidity (D41) |