A Comparison of Menu Costs in Open and Closed Economies with a Mixed Industrial Structure

Huw Dixon and Alberto Pompermaier

Open Economies Review, 1999, vol. 10, issue 4, 365-384

Abstract: In this paper we develop Dixon and Hansen (1997) to allow for two-sector small open economy in which the non-traded sector is monopolistic. The closed economy version of the model generalises Dixon/Hansen to allow for diminishing returns on the traded sector. We compare the short-run impact of menu costs on the economy and also the size of menu costs needed to sustain nominal rigidity in both the open and closed economies. We find that whilst the welfare gains from monetary expansion are of a similar magnitude, nominal rigidity can occur for much smaller menu costs than in the closed economy case. Hence we argue that menu costs and the resultant nominal rigidities are more likely to be important in an open economy. Copyright Kluwer Academic Publishers 1999

Keywords: menu costs; open economy; welfare; monopolistic competition (search for similar items in EconPapers)
Date: 1999
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Working Paper: A comparison of menu-costs in open and closed economies with a mixed industrial structure
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DOI: 10.1023/A:1008329530140

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