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

38 Pages Posted: 19 Jun 2004

See all articles by Olivier J. Blanchard

Olivier J. Blanchard

National Bureau of Economic Research (NBER); Peter G. Peterson Institute for International Economics

Nobuhiro Kiyotaki

London School of Economics & Political Science (LSE) - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: December 1985

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

Blanchard, Olivier J. and Kiyotaki, Nobuhiro, Monopolistic Competition, Aggregate Demand Externalities and Real Effects of Nominal Money (December 1985). NBER Working Paper No. w1770. Available at SSRN: https://ssrn.com/abstract=228048

Olivier J. Blanchard (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Nobuhiro Kiyotaki

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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