Monopolistic Competition, Relative Prices and Output Adjustment in the Open Economy

Joshua Aizenman

NBER Working Paper No. 1787 (Also Reprint No. r1247)
Issued in August 1989
NBER Program(s):   ITI   IFM

The purpose of this paper is to explain price and output dynamics in an open economy characterized by a monopolistic competitive market structure in which pricing decisions incur costs. That lead producers to pre-set the price path for several periods. The paper derives an optimal pricing rule, including the optimal pre-setting horizon. It does so for a rational expectation equilibrium, characterized by staggered, unsynchronized price setting, for which the degree of staggering is endogenously determined. The discussion focuses on the critical role of the degree of domestic-foreign goods substitutability in explaining price and output effects of monetary and real shocks.

(364 K)

(287 K)

Published: Journal of International Money and Finance, Vol. 8, pp. 5-28, (March 1989).

This paper is available as PDF (364 K) or DjVu (287 K) (Download viewer) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX