This paper shows that in macroeconomic models of product differentiation that are built on CES utility specifications, the widely used assumption of approximating cross price effects to zero, (since Dixit-Stiglitz 1979), plays indeed no crucial role. This is true not only when a large number of agents is assumed, but also at the flexible symmetric macro equilibrium where such effects are shown to cancel out regardless of the number of agents. We then show that this latter result is no longer true in the presence of nominal rigidities, where the ratio of cross to own price elasticities, (typically absent in recent New Keynesian models), is shown to be the key determinant of the coefficient of wage and inflation persistence.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.