Non-Neutrality of Money Under Non-Perfect Competition: Why Do Economists Fail to See the Possibility?

Yew-Kwang Ng (kwang.ng@monash.edu)

Chapter 11 in Increasing Returns and Economic Analysis, 1998, pp 232-252 from Palgrave Macmillan

Abstract: Abstract The importance of increasing Retums and product differentiation (including locality) make non-perfect competition ubiquitous in the real world. Thus, economists should allow for non-perfect competition not just in the specific field of industrial organization but also in other areas such as macroeconomics. More than a decade ago, I showed that the introduction of non-perfect competition (subsuming monopolistic competition, oligopoly and monopoly; in fact whenever the firm perceives the demand curve for its product as downward sloping) alone in a standard macroeconomic model with profit-maximization, no time lags, no menu costs or any other transaction costs or frictions, could break the classical dichotomy between the real and the monetary sectors and make money possibly non-neutral (Ng, 1977, 1980, 1982, 1986, 1992). My 1980 Economic Journal paper is regarded by Marris (1991, p. 215) as one ‘which effectively started the modern movement’ in providing an imperfect competition foundation of macroeconomics (see also chapter 10 in this volume). However, in the subsequent mushrooming literature, economists virtually ignored this possible non-neutrality of money under imperfect competition. Thus, as late as 1994, Dixon and Rankin, in their survey of imperfect competition and macroeconomics, conclude that ‘Imperfect competition by itself does not create monetary non-neutrality … It is the combination of imperfect competition with some other distortion which generates the potential for real effects’ (p. 178).

Keywords: Price Level; Money Supply; Demand Curve; Aggregate Demand; Demand Elasticity (search for similar items in EconPapers)
Date: 1998
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DOI: 10.1007/978-1-349-26255-7_13

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