Imperfect Competition, Differential Information, and Microfoundations of Macroeconomics

Imperfect Competition, Differential Information, and Microfoundations of Macroeconomics

Imperfect Competition, Differential Information, and Microfoundations of Macroeconomics

Imperfect Competition, Differential Information, and Microfoundations of Macroeconomics

Synopsis

The past two decades witnessed a substantial change in the field of macroeconomics. The fall of the Keynesian approach after the inflationary episode of the 1970s was followed by the rise of the New Classical approach, which itself was overtaken by the Real Business Cycle and New Keynesian approaches. The driving force behind the change is a desire for a sound microeconomic foundation for macroeconomic theroy. This volume links a microeconomic model of imperfectly informed firms and unions in monopolistic competition to a general theory of wage- and price-setting in a macroeconomic model. The analysis is based on a profit maximization and rational behavior and is in line with the New Keynesian approach in its emphasis on the importance of imperfect competition in explaining macroeconomic phenomena. The volume goes on to explain three stylized facts in macroeconomics: nominal rigidity, real rigidity, and cost-oriented prices, presented in a coherent New Keynesian framework.

Excerpt

The past two decades witnessed a substantial change in the field of macroeconomics. the fall of the Keynesian approach after the inflationary episode of the 1970s was followed by the rise of the New Classical approach, but the New Classical approach was overtaken in the 1980s by the Real Business Cycle and New Keynesian approaches. the driving force behind the change is a desire for sound microeconomic foundation of macroeconomic theory.

This book seeks to link a microeconomic model of imperfectly informed firms and unions in monopolistic competition to a general theory of wage and price-setting in a macroeconomic model. the analysis is based on profit maximization and rational behaviour. It is thus broadly in line with the newly emerged New Keynesian approach which emphasizes the importance of imperfect competition in explaining macroeconomic phenomena. However, this book differs from the existing literature of the New Keynesian economics in its emphasis on the 'synergism' of imperfect competition and imperfect and differential information. It is shown in various chapters that these two forms of market imperfection are capable of producing such macroeconomic phenomena as nominal price rigidity, relative price rigidity, and cost-oriented prices, although neither can produce the phenomena in any significant way if it acts independently. in this sense, this book integrates the New Keynesian Approach emphasizing imperfect competition and the new Classical Approach emphasizing imperfect and differential information.

Some of the material appearing in this book has been adapted from articles that appeared originally in journals. in particular, I am grateful to the editors and publishers of Review of Economic Studies (Ch. 5), International Economic Review (Ch. 6), Economica (Ch. 8), European Economic Review (Ch. 4), Journal of Economic Behavior and Organization (Ch. 9), and Economic Studies Quarterly (Ch. 7) for their permission to include material that was originally published in their journals. I am also pleased to acknowledge the financial assistance of the Mishima Kaiun Foundation, the Seimeikai Foundation, and the Nihon Keizai Kenkyu Shorei Zaidan.

In undertaking a project of this size one necessarily incurs many debts. Jean-Pascal Benassy and Nils Gottfries read an earlier version of Chapter 1 and made suggestions that lead me to rewrite it entirely. the anonymous reader of the Oxford University Press also gave me helpful suggestions about the structure of the book. in addition, I have benefited from discussions with Thomas Russell and Kee Nam Cheung. the opinions and ideas expressed here have resulted from conversations over many years . . .

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