DP1567 Industrial Structure, Menu Costs and the Non-Neutrality of Money

Author(s): Huw David Dixon, Claus Thustrup Hansen
Publication Date: January 1997
Keyword(s): Industrial Structure, New Keynesian Economics
JEL(s): D40, E30, L16
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=1567

New Keynesian literature assumes symmetric industrial structure when analysing explanations of monetary non-neutrality. We analyse the impact of modifying this assumption by allowing for a mixed industrial structure; some industries are characterized by monopolistic competition, and others by perfect competition. The mixed industrial structure implies that there is a misallocation of the input (labour) between sectors. Following a 5% monetary expansion, the menu costs required for price rigidity in the monopolistic sector can be 50 times smaller than in the symmetric case, while the ratio of welfare gain to private loss can be as large as 200 times the corresponding symmetric case. This implies that in real world economies, menu costs may be even more significant than previously thought.