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A Model of Keynesian under Knightian Uncertainty

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Author Info
Shin-ichi Fukuda (Faculty of Economics, University of Tokyo)

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Abstract

The purpose of this paper is to explore a source of nominal price rigidity and non-neutrality of money in a model of monopolistic competition under Knightian uncertainty. The decision-making theory in the analysis is that of expected utility under a nonadditive probability measure, that is, the Choquet expected utility model of preference. We apply this decision theory to a model of monopolistic competition without fixed cost of price adjustment. We show that when aversion to Knightian uncertainty exists, nominal price becomes rigid in a model of monopolistic competition. The model therefore has a Keynesian feature that nominal disturbances, particularly anticipated changes of money supply, have real effects on aggregate output fluctuations. The feature holds even if aversion to Knightian uncertainty is very small.

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Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-115.

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Length: 26 pages
Date of creation: May 2001
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Handle: RePEc:tky:fseres:2001cf115

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  7. Weinrich, Gerd, 1997. "Endogenous Fixprices and Sticky Price Adjustment of Risk-averse Firms," MPRA Paper 6302, University Library of Munich, Germany. [Downloadable!]
  8. Ozaki, Hiroyuki & Streufert, Peter A., 1996. "Dynamic programming for non-additive stochastic objectives," Journal of Mathematical Economics, Elsevier, vol. 25(4), pages 391-442. [Downloadable!] (restricted)
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  11. Dow, James & Werlang, Sergio Ribeiro da Costa, 1992. "Uncertainty Aversion, Risk Aversion, and the Optimal Choice of Portfolio," Econometrica, Econometric Society, vol. 60(1), pages 197-204, January. [Downloadable!] (restricted)
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  15. Kashyap, Anil K, 1995. "Sticky Prices: New Evidence from Retail Catalogs," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 245-74, February. [Downloadable!] (restricted)
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  16. Gerd Weinrich, 1997. "Endogenous fixprices and sticky price adjustment of risk-averse firms," Journal of Economics, Springer, vol. 66(3), pages 283-305, October. [Downloadable!] (restricted)
  17. Mankiw, N Gregory, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model," The Quarterly Journal of Economics, MIT Press, vol. 100(2), pages 529-38, May. [Downloadable!] (restricted)
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  20. Carlton, Dennis W, 1986. "The Rigidity of Prices," American Economic Review, American Economic Association, vol. 76(4), pages 637-58, September. [Downloadable!] (restricted)
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  21. Truman F. Bewley, 1986. "Knightian Decision Theory: Part 1," Cowles Foundation Discussion Papers 807, Cowles Foundation, Yale University. [Downloadable!]
  22. Laurence Ball & N. Gregory Mankiw & David Romer, 1988. "The New Keynsesian Economics and the Output-Inflation Trade-off," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1988-1), pages 1-82. [Downloadable!]
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