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A Mixed Industrial Structure Magnifies the Importance of Menu Costs

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Author Info

  • Huw David Dixon

    (York University)

  • Claus Thustrup Hansen

    (University of Copenhagen Institute of Economics)

Abstract

New Keynesian literature assumes symmetric industrial structure when analysing explanations of money non-neutrality. This paper analyses the impact of modifying this assumption by allowing for a mixed industrial structure; some industries are characterized by monopolistic competition, others by perfect competition. The mixed industrial structure implies misallocation of labour between the different industries which may contribute to explanations of non-neutrality of money. Following a 5% money increase, the menu costs needed for non-neutrality may be 40 times smaller and ratio of welfare gain over private loss more than 100 times larger than in the corresponding model with a symmetric structure.

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File URL: http://dx.doi.org/10.1016/S0014-2921(98)00029-4
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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 97-11.

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Length: 24 pages
Date of creation: Sep 1997
Date of revision:
Publication status: Published in: European Economic Review 43(8) 1999, 1475-1499
Handle: RePEc:kud:kuiedp:9711

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Keywords: New Keynesian economics; industrial structure;

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Cited by:
  1. Philippe Quirion & Meriem Hamdi-Cherif, 2007. "General equilibrium impact of an energy-saving policy in the public sector," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 38(2), pages 245-258, October.
  2. Huw David Dixon & Claus Thustrup Hansen & Henrik J. Kleven, . "Dual Labour Markets and Menu Costs: Explaining the Cyclicality of Productivity and Wage Differentials," EPRU Working Paper Series 99-13, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  3. Thomas Lubik, 2003. "Industrial Structure and Monetary Policy in a Small Open Economy," Economics Working Paper Archive 493, The Johns Hopkins University,Department of Economics.
  4. Claus Thustrup Kreiner, 2002. "Do the New Keynesian Microfoundations Rationalise Stabilisation Policy?," Economic Journal, Royal Economic Society, vol. 112(479), pages 384-401, April.

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