8/2000
May
The Price Index Effect and Macroeconomic Innefficiency
 
Corrado Benassi - Alessandra Chirco - Caterina Colombo


In the Dixit-Stiglitz model of monopolistic competition the espects of individual pricing decisions on the aggregate price index are neglected.
This paper studies the implications of this approximation in terms of the efficiency of macroeconomic equilibria. We show that allowing for the price-index espect, makes the degree of inefficiency positively correlated with the number of agents; it also reduces the scope for New Keynesian outcomes, such as price rigidity and multiple equilibria.

 
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