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A mixed industrial structure magnifies the importance of menu costs

  • David Dixon, Huw
  • Thustrup Hansen, Claus

New Keynesian literature assumes symmetric industrial structure when analysing explanations of money non-neutrality. This paper analyses the impact of modifying this assumption by allowing for a mixed industrial structure; some industries are characterized by monopolistic competition, others by perfect competition. The mixed industrial structure implies misallocation of labour between the different industries which may contribute to explanations of non-neutrality of money. Following a 5% money increase, the menu costs needed for non-neutrality may be 40 times smaller and ratio of welfare gain over private loss more than 100 times larger than in the corresponding model with a symmetric structure.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 43 (1999)
Issue (Month): 8 (August)
Pages: 1475-1499

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Handle: RePEc:eee:eecrev:v:43:y:1999:i:8:p:1475-1499
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