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A Critical Assessment of the Role of Imperfect Competition in Macroeconomics

  • Dennis W. Carlton

New Keynesian models and some models of growth rely on market power for their results. This sole focus on market power as the source for certain macroeconomic phenomena is misguided both theoretically and empirically. New Keynesian multipliers are closely related to standard measures of deadweight loss used in the public finance literature. The theoretical analysis shows that a standard competitive model with taxes exactly reproduces the multipliers in the new Keynesian models, and the empirical evidence strongly suggests that taxes, not market power, will be the far more important influence on explaining short-run fluctuations in GNP. Theory and the empirical evidence suggest that the existence of intellectual property rights is likely to be a more important determinant of innovation than market power. Finally, the paper shows how models that incorporate the cost of market making, durability and dynamic policies, and timing based on the option value of resolving uncertainty can yield more valuable insights into macroeconomic phenomena than can models with market power.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5782.

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Date of creation: Oct 1996
Date of revision:
Publication status: published as in Market Behaviour and Macroeconomic Modelling, Edited by Steven Brakman, Hans Van Ees and Simon Kuipers St. Martin's Press, 1998
Handle: RePEc:nbr:nberwo:5782
Note: EFG IO
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