Monopolistic Competition, Relative Prices and Output Adjustment in the Open Economy

Joshua Aizenman

No 1787, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The purpose of this paper is to explain price and output dynamics in an open economy characterized by a monopolistic competitive market structure in which pricing decisions incur costs. That lead producers to pre-set the price path for several periods. The paper derives an optimal pricing rule, including the optimal pre-setting horizon. It does so for a rational expectation equilibrium, characterized by staggered, unsynchronized price setting, for which the degree of staggering is endogenously determined. The discussion focuses on the critical role of the degree of domestic-foreign goods substitutability in explaining price and output effects of monetary and real shocks.

Date: 1986-01
Note: ITI IFM
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Citations: View citations in EconPapers (5)

Published as Journal of International Money and Finance, Vol. 8, pp. 5-28, (March 1989).

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Journal Article: Monopolistic competition, relative prices, and output adjustment in the open economy (1989)
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