The Price Index Effect and Macroeconomic Inefficiency
AbstractIn the Dixit-Stiglitz model of monopolistic competition the effects of individual pricing decisions on the aggregate price index are neglected. Tliis paper studies the implications of this approximation in terms of the efficiency of macroeconomic equilibria. We show that allowing for the price-index effect, makes the degree of inefficiency positively correiated with the number of agents; it also reduces the scope for New Keynesian outcomes, such as price rigidity and multiple equilibria.
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Bibliographic InfoPaper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (REL - Recherches Economiques de Louvain) with number 2002036.
Date of creation: 01 Sep 2002
Date of revision:
New Keynesian economies; aggregate demand externalities; nominal rididity;
Other versions of this item:
- Corrado Benassi & ssandra Chirco & Erina Colombo, 2002. "The Price Index Effect and Macroeconomic Inefficiency," Recherches économiques de Louvain, De Boeck Université, vol. 68(3), pages 385-394.
- E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
- D62 - Microeconomics - - Welfare Economics - - - Externalities
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