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

Author(s): Huw David Dixon and Claus Thustrup Hansen

Publication Date: January 1997

Keyword(s): Industrial Structure and New Keynesian Economics

Programme Area(s): Industrial Organization

Abstract: 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.

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Bibliographic Reference

Dixon, H and Hansen, C. 1997. 'Industrial Structure, Menu Costs and the Non-Neutrality of Money'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1567