Working Paper: NBER ID: w4502
Authors: Julio J. Rotemberg; Michael Woodford
Abstract: This paper discusses the consequences of introducing imperfectly competitive product markets into an otherwise standard neoclassical growth model. We pay particular attention to the consequences of imperfect competition for the explanation of fluctuations in aggregate economic activity. Market structures considered include monopolistic competition, the 'customer market' model of Phelps and Winter, and the implicit collusion model of Rotemberg and Saloner. Empirical evidence relevant to the numerical calibration of imperfectly competitive models is reviewed. The paper then analyzes the effects of imperfect competition upon the economy's response to several kinds of real shocks, including technology shocks, shocks to the level of government purchases, and shocks that change individual producers' degree of market power. It also discusses the role of imperfect competition in allowing for fluctuations due solely to self-fulfilling expectations.
Keywords: dynamic general equilibrium; imperfect competition; business cycles; technology shocks; government purchases
JEL Codes: E32; D43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| imperfect competition (L13) | economy's response to shocks (E32) |
| government purchases (H59) | output (C67) |
| technology shocks (D89) | output (C67) |
| market power (L11) | misinterpretation of Solow residual (O41) |
| government purchases (H59) | positive Solow residual (O49) |
| markup variations (Y60) | employment fluctuations (J63) |
| markup increase (D49) | labor input demand reduction (J29) |