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A mixed industrial structure magnifies the importance of menu costs

Dixon, Huw David and Hansen, Claus Thustrup 1999. A mixed industrial structure magnifies the importance of menu costs. European Economic Review 43 (8) , pp. 1475-1499. 10.1016/S0014-2921(98)00029-4

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Abstract

New Keynesian literature assumes symmetric industrial structure when analysing explanations of money non-neutrality. This paper analyses the impact of modifying this assumption by allowing for a mixed industrial structure; some industries are characterized by monopolistic competition, others by perfect competition. The mixed industrial structure implies misallocation of labour between the different industries which may contribute to explanations of non-neutrality of money. Following a 5% money increase, the menu costs needed for non-neutrality may be 40 times smaller and ratio of welfare gain over private loss more than 100 times larger than in the corresponding model with a symmetric structure.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > HB Economic Theory
Uncontrolled Keywords: New Keynesian economics; Industrial structure
Publisher: Elsevier
ISSN: 0014-2921
Last Modified: 04 Jun 2017 05:14
URI: http://orca.cf.ac.uk/id/eprint/50057

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