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The Price Index Effect and Macroeconomic Inefficiency

Published online by Cambridge University Press:  17 August 2016

Corrado Benassi ,
Alessandra Chirco  and
Caterina Colombo
Corrado Benassi
Affiliation:
Università di Bologna
Alessandra Chirco
Affiliation:
Università di Lecce
Caterina Colombo
Affiliation:
Università di Bari and Università di Ferrara
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Summary

In the Dixit-Stiglitz model of monopolistic competition the effects of individual pricing decisions on the aggregate price index are neglected. This paper studies the implications of this approximation in terms of the efficiency of macroeconomic equilibria. We show that allowing for the price-index effect, makes the degree of inefficiency positively correlated with the number of agents; it also reduces the scope for New Keynesian outcomes, such as price rigidity and multiple equilibria.

Résumé

Résumé

Dans le modèle Dixit-Stiglitz de concurrence imparfaite, les effets des décisions de prix individuels sur l’index agrégé des prix sont négligés. Cet article étudie les implications de cette approximation sur l’efficience des équilibres macroéconomiques. Nous montrons que l’introduction d’un effet indice des prix induit une corrélation positive entre le degré d’inefficience et le nombre des agents; ceci réduit aussi l’espace de validité pour les résultats néo-keynésiens tels que la rigidité des prix et les équilibres multiples.

Keywords

New Keynesian economicsaggregate demand externalitiesnominal rigidityE12D62Économie néo-keynésienneExternalités de demande agrégéeRigidité nominaleE12D62
Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 68 , Issue 3 , 2002 , pp. 385 - 394
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 2002 

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Footnotes

*

C. Benassi acknowledges financial support from the University of Bologna

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