Working Paper: NBER ID: w1770
Authors: Olivier J. Blanchard; Nobuhiro Kiyotaki
Abstract: A long standing issue in macroeconomics is that of the relation of imperfect competition to fluctuations in output. In this paper we examine the relation between monopolistic competition and the role of aggregate demand in the determination of output. We first show that monopolistically competitive economies exhibit an aggregate demand externality. We then show that, because of this externality, small menu costs, that is small costs of changing prices may lead to large effects of aggregate demand on output and on welfare.
Keywords: Monopolistic Competition; Aggregate Demand; Externalities; Nominal Money
JEL Codes: E31; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nominal money (E42) | output (C67) |
| nominal money (E42) | welfare (I38) |
| aggregate demand (E00) | output (C67) |
| aggregate demand (E00) | welfare (I38) |
| small menu costs (D24) | output (C67) |
| small menu costs (D24) | welfare (I38) |