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Monopolistic Competition, Overlapping Generations, And The Role Of Monetary Policy

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  • Chang, Roberto

Abstract

This paper studies a simple overlapping generations model (OGM) with monopolistic competition in goods markets. I show that the set of rational expectations equilibria of the model can be characterized by a simple difference equation in the real quantity of money, in the same way as the standard, competitive OGM. The monopolistic competition case results, however, in less output, consumption, and lower welfare relative to the competitive case. The model is then used to reexamine some issues of monetary policy. Previous studies have stressed that the existence of imperfect competition in goods markets may justify activist monetary policy. I show that this rationale for policy intervention remains true in dynamic models, although transmissions mechanisms and policy prescriptions turn out to be very different. This is shown by discussing the effectiveness of monetary policy, the optimal quantity of money, and the welfare cost of inflationary finance.

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File URL: http://econ.as.nyu.edu/docs/IO/9394/RR89-16.pdf
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Bibliographic Info

Paper provided by C.V. Starr Center for Applied Economics, New York University in its series Working Papers with number 89-16.

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Length: 22 pages
Date of creation: 1989
Date of revision:
Handle: RePEc:cvs:starer:89-16

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Postal: C.V. Starr Center, Department of Economics, New York University, 19 W. 4th Street, 6th Floor, New York, NY 10012
Phone: (212) 998-8936
Fax: (212) 995-3932
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Web page: http://econ.as.nyu.edu/object/econ.cvstarr.html
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Postal: C.V. Starr Center, Department of Economics, New York University, 19 W. 4th Street, 6th Floor, New York, NY 10012
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Related research

Keywords: monopolies ; competition ; economic models ; social welfare;

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