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Neo-Neutrality of Money Under Non-Perfect Competition: Why do Economists Fail to See the Possibility?

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posted on 06.06.2017, 01:59 by Ng, Yew-Kwang
Despite the demonstration that non-perfect competition makes money possibly non-neutral (Ng 1977, 1980, 1982, 1986, 1992), economists now (e.g. Dixon and Rankin 1994) still regard additional distortions or frictions, such as menu costs, as necessary, in combination with non-perfect competition, to make money non-neutral. This paper explains this inconsistency. Really, it has only been shown that a real equilibrium can still be an equilibrium even if money supply changes. However, a change in money supply may also shift the economy from one equilibrium to another. When such possibilities prevail, there exists an interfirm macroeconomic externality where the expansion by each firm benefits other firms apart from the familiar income multiplier effects. Some real-world factors making monetary non-neutrality more likely to prevail are briefly outlined. In particular, revenue maximization and average-cost pricing increases the likelihood. When the economy does not but is close to possessing a continuum of equilibria, a tax reduction as aggregate demand increases may make a higher real output sustainable as an equilibrium point. Moreover, the tax reduction may be self-financing.

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Year of first publication

1995

Series

Department of Economics.

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