Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity

61 Pages Posted: 17 Oct 2007 Last revised: 21 May 2008

See all articles by Julio J. Rotemberg

Julio J. Rotemberg

Harvard University, Business, Government and the International Economy Unit (deceased); National Bureau of Economic Research (NBER) (deceased)

Michael Woodford

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Date Written: December 1989

Abstract

We construct a dynamic general equilibrium model in which the typical industry colludes by threatening to punish deviations from an implicitly agreed upon pricing path. We argue that models of this type explain better than do competitive models the way in which the economy responds to aggregate demand shocks. When we calibrate a linearized version of the model using methods similar to those of Kydland and Prescott (1982), we obtain predictions concerning the economy's response to changes in military spending which are close to the response we estimate with postwar US data.

Suggested Citation

Rotemberg, Julio J. and Woodford, Michael, Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity (December 1989). NBER Working Paper No. w3206. Available at SSRN: https://ssrn.com/abstract=467643

Julio J. Rotemberg (Contact Author)

Harvard University, Business, Government and the International Economy Unit (deceased) ( email )

Cambridge, MA
United States
617-495-1015 (Phone)
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National Bureau of Economic Research (NBER) (deceased)

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Michael Woodford

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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