Multiple Equilibria and Interfirm Macro-Externality: An Analysis of Sluggish Real Adjustment

Yew-Kwang Ng () and Ying Wu

Annals of Economics and Finance, 2004, vol. 5, issue 1, 61-77

Abstract: In an imperfectly competitive economy, a continuum of equilibria at the firm level exists under certain analytical conditions (Ng 1986). Extending the earlier analysis of a representative firm, this paper shows that even if the condition for a continuum of equilibria is not exactly satisfied, the factors of price-adjustment costs, interfirm heterogeneity, and macro-externality can cause the economy to be stuck at the quasi macroequilibria after aggregate demand experiences a contractionary shock. Although adjustment costs are small and gains from adjustment are potentially large, the adjustment tends to be sluggish due to the existence of interfirm macro-externality.

Keywords: Imperfect competition; Externality; Adjustment cost; Aggregate demand (search for similar items in EconPapers)
JEL-codes: D43 D62 E31 E32 (search for similar items in EconPapers)
Date: 2004
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Persistent link: https://EconPapers.repec.org/RePEc:cuf:journl:y:2004:v:5:i:1:p:61-77

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