Market Structure and Monetary Non-neutrality

68 Pages Posted: 17 Sep 2021

Multiple version iconThere are 2 versions of this paper

Date Written: September 13, 2021

Abstract

I study a general equilibrium menu cost model with a continuum of sectors, idiosyncratic and aggregate shocks, and the novel feature that each sector consists of strategically engaged firms. Compared to an economy with monopolistically competitive sectors—separately parameterized to match the same microdata on price flexibility—the oligopoly economy features a smaller response of inflation to monetary shocks and output responses that are more than twice as large. Under the same parameters, output responses are five times larger. An oligopoly economy also (i) requires smaller menu costs and idiosyncratic shocks to match the microdata, addressing a significant challenge for mechanisms that generate non-neutrality via strategic complementarities, (ii) implies four times larger welfare losses from same sized nominal rigidities, and (iii) provides a novel rationale for positive menu costs: in an oligopoly firms prefer a degree of rigidity to complete flexibility. Quantitatively, the estimated degree of nominal rigidity is found to be close to optimal, from firms’ perspective.

JEL Classification: E0,E31,E32

Suggested Citation

Mongey, Simon, Market Structure and Monetary Non-neutrality (September 13, 2021). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2021-110, Available at SSRN: https://ssrn.com/abstract=3924339 or http://dx.doi.org/10.2139/ssrn.3924339

Simon Mongey (Contact Author)

University of Chicago ( email )

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
30
Abstract Views
268
PlumX Metrics