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The Price Index Effect and Macroeconomic Inefficiency


  • Corrado Benassi
  • Sandra Chirco
  • Erina Colombo


In the Dixit-Stiglitz model of monopolistic competition the effects of individual pricing decisions on the aggregate price index are neglected. Tliis paper studies the implications of this approximation in terms of the efficiency of macroeconomic equilibria. We show that allowing for the price-index effect, makes the degree of inefficiency positively correiated with the number of agents; it also reduces the scope for New Keynesian outcomes, such as price rigidity and multiple equilibria.
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Suggested Citation

  • Corrado Benassi & Sandra Chirco & Erina Colombo, 2002. "The Price Index Effect and Macroeconomic Inefficiency," Recherches économiques de Louvain, De Boeck Université, vol. 68(3), pages 385-394.
  • Handle: RePEc:cai:reldbu:rel_683_0385

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    Cited by:

    1. Bratsiotis, George J., 2008. "Influential price and wage setters, monetary policy and real effects," European Journal of Political Economy, Elsevier, vol. 24(2), pages 503-517, June.

    More about this item

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • D62 - Microeconomics - - Welfare Economics - - - Externalities


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