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A Critical Assessment of the Role of Imperfect Competition in Macroeconomics


Dennis W. Carlton


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

October 1996

NBER Working Paper No. w5782

Abstract:     
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.

Number of Pages in PDF File: 47

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Date posted: April 7, 1997  

Suggested Citation

Carlton , Dennis W., A Critical Assessment of the Role of Imperfect Competition in Macroeconomics (October 1996). NBER Working Paper No. w5782. Available at SSRN: http://ssrn.com/abstract=3862

Contact Information

Dennis W. Carlton (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
312-322-0215 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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