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Returns to Scale, Market Power, and the Nature of Price Rigidity in New Keynesian Models with Self‐Fulfilling Expectations
Author(s) -
HUANG KEVIN X.D.,
MENG QINGLAI
Publication year - 2014
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12107
Subject(s) - economics , new keynesian economics , rigidity (electromagnetism) , monetary policy , market power , keynesian economics , scale (ratio) , monetary economics , macroeconomics , microeconomics , physics , structural engineering , quantum mechanics , engineering , monopoly
Increasing returns to scale and firms' market power are two potential sources of sunspot expectations in neoclassical models. We show that in New Keynesian models, returns to scale and market power can have fundamentally different implications for broad macroeconomic issues, including self‐fulfilling expectations, depending on the nature of price rigidity. Our findings suggest that the design of stabilization monetary policy can depend on precise knowledge about the economy's real and nominal features. Therefore, a clear understanding of the specific economic environment and its relevance to monetary policymaking for ensuring macroeconomic stability can be an integrated part of monetary policy practice.