Monopolistic Competition, Relative Prices and Output Adjustment in the Open Economy
NBER Working Paper No. 1787 (Also Reprint No. r1247)
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.
Document Object Identifier (DOI): 10.3386/w1787
Published: Journal of International Money and Finance, Vol. 8, pp. 5-28, (March 1989). citation courtesy of
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