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The Price Index Effect and Macroeconomic Inefficiency


  • Corrado BENASSI

    (Università di Bologna)

  • Alessandra CHIRCO

    (Università di Lecce)

  • Caterina COLOMBO

    (Università di Bari and Università di Ferrara)


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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    References listed on IDEAS

    1. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-1366, September.
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    3. Petersen, Mitchell A & Rajan, Raghuram G, 1997. "Trade Credit: Theories and Evidence," Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 661-691.
    4. Jocelyn Martel, 1996. "Solutions au stress financier : Un survol de la littérature," CIRANO Working Papers 96s-03, CIRANO.
    5. Mian, Shehzad L & Smith, Clifford W, Jr, 1992. " Accounts Receivable Management Policy: Theory and Evidence," Journal of Finance, American Finance Association, vol. 47(1), pages 169-200, March.
    6. J. Stephen Ferris, 1981. "A Transactions Theory of Trade Credit Use," The Quarterly Journal of Economics, Oxford University Press, vol. 96(2), pages 243-270.
    7. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
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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


    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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