A Critical Assessment of the Role of Imperfect Competition in Macroeconomics
47 Pages Posted: 7 Apr 1997 Last revised: 26 Oct 2022
Date Written: October 1996
Abstract
New Keynesian models and some models of growth rely on market power for their results. This sole focus on market power as the source for certain macroeconomic phenomena is misguided both theoretically and empirically. New Keynesian multipliers are closely related to standard measures of deadweight loss used in the public finance literature. The theoretical analysis shows that a standard competitive model with taxes exactly reproduces the multipliers in the new Keynesian models, and the empirical evidence strongly suggests that taxes, not market power, will be the far more important influence on explaining short-run fluctuations in GNP. Theory and the empirical evidence suggest that the existence of intellectual property rights is likely to be a more important determinant of innovation than market power. Finally, the paper shows how models that incorporate the cost of market making, durability and dynamic policies, and timing based on the option value of resolving uncertainty can yield more valuable insights into macroeconomic phenomena than can models with market power.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Uncertainty and Investment Dynamics
By Nicholas Bloom, Stephen R. Bond, ...
-
The Differential Impact of Uncertainty on Investment in Small and Large Businesses
By Vivek Ghosal and Prakash Loungani
-
Uncertainty and Economic Activity: Evidence from Business Survey Data
By Ruediger Bachmann, Steffen Elstner, ...
-
Exploring the Role of Uncertainty for Corporate Investment Decisions in Germany
-
Uncertainty and Company Investment Dynamics: Empirical Evidence for UK Firms
By Nicholas Bloom, Stephen R. Bond, ...
-
Does Demand and Price Uncertainty Affect Belgian and Spanish Corporate Investment?
-
The Impact of Uncertainty on Investment Plans
By Paul Butzen, Catherine Fuss, ...
-
Firm-Specific Productivity Risk Over the Business Cycle: Facts and Aggregate Implications
By Ruediger Bachmann and Christian Bayer