Market Structure and Monetary Non-neutrality
No 558, Staff Report from Federal Reserve Bank of Minneapolis
I propose an equilibrium menu cost model with a continuum of sectors, each consisting of strategically engaged firms. Compared to a model with monopolistically competitive sectors that is calibrated to the same data on good-level price flexibility, the dynamic duopoly model features a smaller inflation response to monetary shocks and output responses that are more than twice as large. The model also implies (i) four times larger welfare losses from nominal rigidities, (ii) smaller menu costs and idiosyncratic shocks are needed to match the data, (iii) a U-shaped relationship between market concentration and price flexibility, for which I find empirical support.
Keywords: Oligopoly; Menu costs; Monetary policy; Firm dynamics (search for similar items in EconPapers)
JEL-codes: E30 E39 E51 L11 L13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Working Paper: Market Structure and Monetary Non-Neutrality (2017)
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