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A Mixed Industrial Structure Magnifies the Importance of Menu Costs

  • Huw David Dixon

    (York University)

  • Claus Thustrup Hansen

    (University of Copenhagen Institute of Economics)

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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Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 97-11.

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Length: 24 pages
Date of creation: Sep 1997
Date of revision:
Publication status: Published in: European Economic Review 43(8) 1999, 1475-1499
Handle: RePEc:kud:kuiedp:9711
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