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Monopolistic Competition, Aggregate Demand Externalities and Real Effects of Nominal Money

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  • Olivier J. Blanchard
  • Nobuhiro Kiyotaki

Abstract

A long standing issue in macroeconomics is that of the relation of imperfect competition to fluctuations in output. In this paper we examine the relation between monopolistic competition and the role of aggregate demand in the determination of output. We first show that monopolistically competitive economies exhibit an aggregate demand externality. We then show that, because of this externality, small menu costs, that is small costs of changing prices may lead to large effects of aggregate demand on output and on welfare.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1770.

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Date of creation: Dec 1985
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Publication status: published as Blanchard, Olivier and Nobuhiro Kiyotaki. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, Vol. 77, No. 4, September 1987, pp. 647-666.
Handle: RePEc:nbr:nberwo:1770

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Cited by:
  1. Ridhwan, M.M. & Nijkamp, P. & Rietveld, P., 2008. "Regional development and monetary policy : a review of the role of monetary unions, capital mobility and locational effects," Serie Research Memoranda, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics 0007, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
  2. Laurence Ball & David Romer, 1987. "The Equilibrium and Optimal Timing of Price Changes," NBER Working Papers 2432, National Bureau of Economic Research, Inc.
  3. Lawrence F. Katz, 1986. "Efficiency Wage Theories: A Partial Evaluation," NBER Chapters, in: NBER Macroeconomics Annual 1986, Volume 1, pages 235-290 National Bureau of Economic Research, Inc.
  4. Shleifer, Andrei & Vishny, Robert W, 1988. "The Efficiency of Investment in the Presence of Aggregate Demand Spillovers," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(6), pages 1221-31, December.
  5. Mankiw, N. Gregory, 1988. "Imperfect competition and the Keynesian cross," Economics Letters, Elsevier, Elsevier, vol. 26(1), pages 7-13.
  6. Julio Rotemberg & Garth Saloner, 1986. "The Relative Rigidity of Monopoly Pricing," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 414, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Willem H. Buiter, 1987. "The Right Combination of Demand and Supply Policies: The Case for a Two-Handed Approach," NBER Working Papers 2333, National Bureau of Economic Research, Inc.

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