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Monopolistic Competition, Aggregate Demand Externalities and Real Effects of Nominal Money

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  • Olivier J. Blanchard
  • Nobuhiro Kiyotaki

Abstract

A long standing issue in macroeconomics is that of the relation of imperfect competition to fluctuations in output. In this paper we examine the relation between monopolistic competition and the role of aggregate demand in the determination of output. We first show that monopolistically competitive economies exhibit an aggregate demand externality. We then show that, because of this externality, small menu costs, that is small costs of changing prices may lead to large effects of aggregate demand on output and on welfare.

Suggested Citation

  • Olivier J. Blanchard & Nobuhiro Kiyotaki, 1985. "Monopolistic Competition, Aggregate Demand Externalities and Real Effects of Nominal Money," NBER Working Papers 1770, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1770 Note: EFG
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    References listed on IDEAS

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    1. Rudiger Dornbusch, 1982. "Flexible Exchange Rates and Interdependence," NBER Working Papers 1035, National Bureau of Economic Research, Inc.
    2. Jeffrey Sachs, 1985. "The Dollar and the Policy Mix: 1985," NBER Working Papers 1636, National Bureau of Economic Research, Inc.
    3. Joshua Aizenman, 1984. "Testing Deviations From Purchasing Power Parity (PPP)," NBER Working Papers 1475, National Bureau of Economic Research, Inc.
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    Cited by:

    1. van de Klundert, T.C.M.J., 1987. "Coordination failure in an industrial society," Other publications TiSEM 95c6a69d-820e-49db-8b11-1, Tilburg University, School of Economics and Management.
    2. Shleifer, Andrei & Vishny, Robert W, 1988. "The Efficiency of Investment in the Presence of Aggregate Demand Spillovers," Journal of Political Economy, University of Chicago Press, vol. 96(6), pages 1221-1231, December.
    3. Rotemberg, Julio J & Saloner, Garth, 1987. "The Relative Rigidity of Monopoly Pricing," American Economic Review, American Economic Association, vol. 77(5), pages 917-926, December.
    4. Davide Porcellacchia, 2016. "Wage-Price Dynamics and Structural Reforms in Japan," IMF Working Papers 16/20, International Monetary Fund.
    5. Lawrence F. Katz, 1986. "Efficiency Wage Theories: A Partial Evaluation," NBER Chapters,in: NBER Macroeconomics Annual 1986, Volume 1, pages 235-290 National Bureau of Economic Research, Inc.
    6. Mankiw, N. Gregory, 1988. "Imperfect competition and the Keynesian cross," Economics Letters, Elsevier, vol. 26(1), pages 7-13.
    7. Laurence Ball & David Romer, 1989. "The Equilibrium and Optimal Timing of Price Changes," Review of Economic Studies, Oxford University Press, vol. 56(2), pages 179-198.
    8. Willem H. Buiter, 1987. "The Right Combination of Demand and Supply Policies: The Case for a Two-Handed Approach," NBER Working Papers 2333, National Bureau of Economic Research, Inc.

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