Market Segmentation and Effective Demand Shortage in a World with Dynamic Optimization

Yoshiyasu Ono

No 94-14, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics

Abstract: We consider a competitive two-country monetary model with infinitely-lived optimizing agents and sluggish price adjustment, in which households can buy only the commodities sold in their own country and firms allocate products between the two countries so that the expected marginal revenue equals internationally. In this model worldwide stagnation occurs on the equilibrium path. The richer country faces more serious stagnation, higher commodity consumption is smaller. Its currency keeps appreciating over the other currency. own and spill-over effects of stimulative policies are also examined.

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