Do small menu costs cause bigger and badder business cycles in monopolistic macroeconomies?
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.
|Journal||Journal of Macroeconomics|
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