Monopolistic Competition, Aggregate Demand Externalities and Real Effects of Nominal Money
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NBER Working Paper No. 1770 (Also Reprint No. r1113)
Issued in February 1989
NBER Program(s): EFG
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.
Published: Blanchard, Olivier and Nobuhiro Kiyotaki. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, Vol. 77, No. 4, September 1987, pp. 647-666.
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