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Monopolistic Competition, Relative Prices and Output Adjustment in the Open Economy

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  • Joshua Aizenman

Abstract

The purpose of this paper is to explain price and output dynamics in an open economy characterized by a monopolistic competitive market structure in which pricing decisions incur costs. That lead producers to pre-set the price path for several periods. The paper derives an optimal pricing rule, including the optimal pre-setting horizon. It does so for a rational expectation equilibrium, characterized by staggered, unsynchronized price setting, for which the degree of staggering is endogenously determined. The discussion focuses on the critical role of the degree of domestic-foreign goods substitutability in explaining price and output effects of monetary and real shocks.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1787.

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Date of creation: Jan 1986
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Publication status: published as Journal of International Money and Finance, Vol. 8, pp. 5-28, (March 1989).
Handle: RePEc:nbr:nberwo:1787

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References

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  1. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  2. Richard Meese & Kenneth Rogoff, 1982. "The out-of-sample failure of empirical exchange rate models: sampling error or misspecification?," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 204, Board of Governors of the Federal Reserve System (U.S.).
  3. Fischer, Stanley, 1977. "Wage indexation and macroeconomics stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 5(1), pages 107-147, January.
  4. Robert P. Flood & Robert J. Hodrick, 1983. "Optimal Price and Inventory Adjustment in an Open-Economy Model of the Business Cycle," NBER Working Papers 1089, National Bureau of Economic Research, Inc.
  5. Sheshinski, Eytan & Weiss, Yoram, 1977. "Inflation and Costs of Price Adjustment," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 44(2), pages 287-303, June.
  6. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(1), pages 1-23, February.
  7. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  8. Isard, Peter, 1977. "How Far Can We Push the "Law of One Price"?," American Economic Review, American Economic Association, American Economic Association, vol. 67(5), pages 942-48, December.
  9. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
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Cited by:
  1. Joshua Aizenman, 1991. "Foreign Direct Investment, Productive Capacity and Exchange Rate Regimes," NBER Working Papers 3767, National Bureau of Economic Research, Inc.
  2. Svensson, Lars E O & van Wijnbergen, Sweder, 1989. "Excess Capacity, Monopolistic Competition, and International Transmission of Monetary Disturbances," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 99(397), pages 785-805, September.
  3. Huw Dixon & Alberto Pompermaier, 1999. "A Comparison of Menu Costs in Open and Closed Economies with a Mixed Industrial Structure," Open Economies Review, Springer, Springer, vol. 10(4), pages 365-384, October.
  4. Andersen, Torben M., 1997. "Exchange Rate Volatility, Nominal Rigidities, and Persistent Deviations from PPP," Journal of the Japanese and International Economies, Elsevier, vol. 11(4), pages 584-609, December.
  5. Yang, Yung Y. & Hwang, Min, 2001. "The pricing behavior of Korean manufactured goods during trade liberalization," Journal of Policy Modeling, Elsevier, Elsevier, vol. 23(4), pages 357-369, May.
  6. Sweder van Wijnbergen, 1987. "Monopolistic Competition, Credibility and the Output Costs of Disinflation Programs: An Analysis of Price Controls," NBER Working Papers 2302, National Bureau of Economic Research, Inc.

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