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The Price Index Effect and Macroeconomic Inefficiency

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Author Info
Corrado BENASSI (Universitˆ di Bologna)
Alessandra CHIRCO (Universitˆ di Lecce)
Caterina COLOMBO (Universitˆ di Bari and Universitˆ di Ferrara)

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Abstract

In 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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Publisher Info
Paper 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.

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Length: 10
Date of creation: 01 Sep 2002
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Handle: RePEc:ctl:louvre:2002036

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Related research
Keywords: New Keynesian economies; aggregate demand externalities; nominal rididity;

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Find related papers by JEL classification:
E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
D62 - Microeconomics - - Welfare Economics - - - Externalities

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