I present a macroeconomic model of monopolistic and monopsonistic firms facing general demand and labor supply functions. Small costs of changing prices support large output fluctuations when nominal demand changes; this holds in both partial equilibrium and macroeconomic contexts, and for both monopolistic and competitive firms. A monopolistic economy may exhibit multiplier effects, but need not allow bigger business cycles than a competitive economy. Small menu costs have large welfare consequences only in monopolistic economies, but the welfare costs of symmetric fluctuations are on average trivial in any case.

Additional Metadata
Persistent URL dx.doi.org/10.1016/0164-0704(89)90015-3
Journal Journal of Macroeconomics
Citation
Rowe, N. (1989). Do small menu costs cause bigger and badder business cycles in monopolistic macroeconomies?. Journal of Macroeconomics, 11(1), 25–48. doi:10.1016/0164-0704(89)90015-3