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The Price Index Effect and Macroeconomic Inefficiency

Author

Listed:
  • Corrado BENASSI

    (Università di Bologna)

  • Alessandra CHIRCO

    (Università di Lecce)

  • Caterina COLOMBO

    (Università di Bari and Università di Ferrara)

Abstract

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.

Suggested Citation

  • Corrado BENASSI & Alessandra CHIRCO & Caterina COLOMBO, 2002. "The Price Index Effect and Macroeconomic Inefficiency," Discussion Papers (REL - Recherches Economiques de Louvain) 2002036, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  • Handle: RePEc:ctl:louvre:2002036
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    File URL: http://sites.uclouvain.be/econ/DP/REL/2002036.pdf
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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

    Keywords

    New Keynesian economies; aggregate demand externalities; nominal rididity;

    JEL classification:

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

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