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A Comparison of Menu Costs in Open and Closed Economies with a Mixed Industrial Structure

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  • Huw Dixon

    ()

  • Alberto Pompermaier

Abstract

In this paper we develop Dixon and Hansen (1997) to allow for two-sector small open economy in which the non-traded sector is monopolistic. The closed economy version of the model generalises Dixon/Hansen to allow for diminishing returns on the traded sector. We compare the short-run impact of menu costs on the economy and also the size of menu costs needed to sustain nominal rigidity in both the open and closed economies. We find that whilst the welfare gains from monetary expansion are of a similar magnitude, nominal rigidity can occur for much smaller menu costs than in the closed economy case. Hence we argue that menu costs and the resultant nominal rigidities are more likely to be important in an open economy. Copyright Kluwer Academic Publishers 1999

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File URL: http://hdl.handle.net/10.1023/A:1008329530140
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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 10 (1999)
Issue (Month): 4 (October)
Pages: 365-384

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Handle: RePEc:kap:openec:v:10:y:1999:i:4:p:365-384

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Web page: http://www.springerlink.com/link.asp?id=100323

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Keywords: menu costs; open economy; welfare; monopolistic competition;

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  1. Caballero, R.J. & Lyons, R.K., 1991. "External Effects in U.S. Procyclical Productivity," Papers 91-19, Columbia - Graduate School of Business.
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  5. Dixon, Huw David & Hansen, Claus Thustrup, 1997. "Industrial Structure, Menu Costs and the Non-Neutrality of Money," CEPR Discussion Papers 1567, C.E.P.R. Discussion Papers.
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  10. Pencavel, John, 1987. "Labor supply of men: A survey," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 1, pages 3-102 Elsevier.
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  12. Basu, Susanto, 1995. "Intermediate Goods and Business Cycles: Implications for Productivity and Welfare," American Economic Review, American Economic Association, vol. 85(3), pages 512-31, June.
  13. Rotemberg, Julio J & Summers, Lawrence H, 1990. "Inflexible Prices and Procyclical Productivity," The Quarterly Journal of Economics, MIT Press, vol. 105(4), pages 851-74, November.
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