Monopolistic Competition as a Foundation for Keynesian Macroeconomic Models

Richard Startz

The Quarterly Journal of Economics, 1989, vol. 104, issue 4, 737-752

Abstract: A general equilibrium macroeconomic model based on monopolistic competition is presented. The model exhibits a traditional multiplier in the short run, but due to free entry, the multiplier disappears in the long run. By construction all agents are fully rational. The Keynesian results are a consequence of the assumption of monopolistic competition, which creates a divergence between optimal private behavior and optimal social behavior.

Date: 1989
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