1987•American Economic ReviewRequires access

Monopolistic Competition and the Effects of Aggregate Demand

Olivier Blanchard, Nobuhiro Kiyotaki

Abstract

How important is monopolistic competition to an understanding of the effects of aggregate demand on output? The authors ask this question at three levels. Can monopolistic competition, by itself, explain why aggregate demand affects output? Can it, together with other imperfections, generate effects of aggregate demand in a way that perfect competition cannot? If so, can it give an accurate account of the res ponse of the economy to aggregate demand movements? The answers are no, yes, and yes. Copyright 1987 by American Economic Association.

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Key concepts: Monopolistic competition, Economics, Aggregate demand, Aggregate (composite), Microeconomics, Competition (biology), Aggregate behavior, Aggregate expenditure