A Critical Assessment of the Role of Imperfect Competition in Macroeconomics / Dennis W. Carlton.

By:

Carlton, Dennis W

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w5782.Publication details: Cambridge, Mass. National Bureau of Economic Research 1996.Description: 1 online resource: illustrations (black and white)Subject(s):

D43 - Oligopoly and Other Forms of Market Imperfection
L16 - Industrial Organization and Macroeconomics: Industrial Structure and Structural Change • Industrial Price Indices

Online resources:

Available additional physical forms:

Hardcopy version available to institutional subscribers

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.

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October 1996.

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.