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Multiple Equilibria and Interfirm Macro-Externality: An Analysis of Sluggish Real Adjustment

  • Yew-Kwang Ng

    (Faculty of Business and Economics, Monash University)

  • Ying Wu

    ()

    (Department of Economics and Finance, Franklin P. Perdue School of Business Salisbury University)

In an imperfectly competitive economy, a continuum of equilibria at the firm level exists under certain analytical conditions (Ng 1986). Extending the earlier analysis of a representative firm, this paper shows that even if the condition for a continuum of equilibria is not exactly satisfied, the factors of price-adjustment costs, interfirm heterogeneity, and macro-externality can cause the economy to be stuck at the quasi macroequilibria after aggregate demand experiences a contractionary shock. Although adjustment costs are small and gains from adjustment are potentially large, the adjustment tends to be sluggish due to the existence of interfirm macro-externality.

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Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 5 (2004)
Issue (Month): 1 (May)
Pages: 61-77

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Handle: RePEc:cuf:journl:y:2004:v:5:i:1:p:61-77
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