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A Comparison of Menu Costs in Open and Closed Economies with a Mixed Industrial Structure

  • Huw Dixon

    ()

  • Alberto Pompermaier

In this paper we develop Dixon and Hansen (1997) to allow for two-sector small open economy in which the non-traded sector is monopolistic. The closed economy version of the model generalises Dixon/Hansen to allow for diminishing returns on the traded sector. We compare the short-run impact of menu costs on the economy and also the size of menu costs needed to sustain nominal rigidity in both the open and closed economies. We find that whilst the welfare gains from monetary expansion are of a similar magnitude, nominal rigidity can occur for much smaller menu costs than in the closed economy case. Hence we argue that menu costs and the resultant nominal rigidities are more likely to be important in an open economy. Copyright Kluwer Academic Publishers 1999

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File URL: http://hdl.handle.net/10.1023/A:1008329530140
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Article provided by Springer in its journal Open Economies Review.

Volume (Year): 10 (1999)
Issue (Month): 4 (October)
Pages: 365-384

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Handle: RePEc:kap:openec:v:10:y:1999:i:4:p:365-384
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  1. Laurence Ball & David Romer, 1987. "Sticky Prices as Coordination Failure," NBER Working Papers 2327, National Bureau of Economic Research, Inc.
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  3. Daniel Levy & Mark Bergen & Shantanu Dutta & Robert Venable, 2005. "The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains," Macroeconomics 0505012, EconWPA.
  4. Dixon, Huw David & Hansen, Claus Thustrup, 1997. "Industrial Structure, Menu Costs and the Non-Neutrality of Money," CEPR Discussion Papers 1567, C.E.P.R. Discussion Papers.
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  13. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
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  16. N. Gregory Mankiw, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 100(2), pages 529-538.
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