Working Paper: CEPR ID: DP636
Authors: Huw Dixon; Neil Rankin
Abstract: This survey outlines the general lessons of the recent literature on imperfectly competitive macroeconomies for the theory of monetary and fiscal policy. A general framework is presented which encompasses most of the existing literature. Although money is of itself neutral in these models, the presence of menu costs, expectations which are not unit elastic, or sectoral nominal rigidities can result in a welfare-improving role for monetary policy. Imperfect competition also enhances the scope for the beneficial influence of fiscal policy. We explore the possibilities for multiple Pareto-ranked equilibria and the role of increasing returns to scale.
Keywords: imperfect competition; macroeconomics; monetary policy; fiscal policy
JEL Codes: E32; E52; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| imperfect competition (L13) | lower equilibrium output (D59) |
| imperfect competition (L13) | lower employment (J63) |
| imperfect competition (L13) | Pareto-inefficient allocation of resources (D61) |
| imperfect competition (L13) | involuntary unemployment (J64) |
| monetary policy + menu costs (E39) | real effects on output (E23) |
| increase in money supply + menu costs (E51) | significant expansion of output (E23) |
| fiscal policy (E62) | real effects on output (E23) |
| monetary or fiscal policy increases output (E62) | welfare-improving (D60) |
| coordination among agents (D70) | shift from low-output to high-output equilibrium (D59) |
| increasing returns to scale in production (E23) | contributes to dynamics (C69) |