Price Normalization and Monetary Rule in Imperfect Competition General Equilibrium Models: A Note
It is now well known that in models with imperfect competition the choice of the normalization rule may have real effects. The scope and the reason of this result are investigated. I first show that a clear distinction must be made between imperfect competition based on quantity versus nominal strategic variables. In this latter case, the maximization of the shareholders' utility is not sufficient to cancel the real effects of the price normalization. In order for an equilibrium to be determined, a normalization rule describing the relation between strategic variables and aggregate demand (the so called Ford effects) is required. In a second stage, I show that introducing money is not by itself sufficient to prevent the multiplicity of equilibria. Indeed, any non-monetary equilibrium can be replicated in a monetary economy by appropriately choosing the monetary rule. Hence, the introduction of money does not resolve the price normalization indetermination but transform it into an economic policy issue.
|Date of creation:||01 Apr 1999|
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