A Model of Keynesian under Knightian Uncertainty
AbstractThe 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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Bibliographic InfoPaper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-115.
Length: 26 pages
Date of creation: May 2001
Date of revision:
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-05-16 (All new papers)
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