In fact I followed the Greg Mankiw's Blog, when I started to blog. Its blogger, N.Gregory Mankiw, is a world-famous economics professor of Harvard University.
He is known for the field of macroeconomics: especially the issue of sticky price in the monopolisticly competitive market. He is, so-called, the pioneer of New Keynesian economics, which says that the staggering adjustment of price in the market economy leads to serious recession. Professor Mankiw wrote it in the memorial article, "Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly", Quarterly Journal of Economics, 1985.
It says that small menu costs can cause large welfare losses. Menu costs mean the costs of altering a posted price in the store, printing new catalogs and informing salesmen or saleswomen of the new price. And welfare losses stand for the hardship led by serious recession.
Explaining its detail is beyond the scope of this blog. Dr. Mankiw, anyway, has made a great contribution to the researches on macroeconomics. And he also teaches very briefly and clearly macroeconomics to the students all over the world including me. His macroeconomics textbook robbed me of my time and energy and made me enthusiastic about the issues on macroeconomics. He writes very well and explains something difficult very easily. His blog is noteworthy and easy and interesting for even non-economics people to read.
16 comments:
Hasn't the Internet reduced menu costs? If so, won't the prices become less sticky, and won't the New Keynesians become irrelevant?
Anonymous,
Internet might reduce menu costs. However, maybe typical labor contracts are structured similarly. Perhaps wage prices are still sticky.
If menu costs are lower then monetary policy is less effectual to cylically finetune the economy. Maybe cyclical finetuning isn't as necessary, though.
Sticky prices are a delusion of the Keynesians to justify a more interventionist government!
Thank you for your comments. I didn't think that this topic lured strong interest.
Let me mention this issue:I think that prices are really sticky in our economy because many firms are doing business in the market of monopolistic competition. If many firms are in the perfectly competitive market, the prices(and wages,too)are less sticky and more adjustable. More adjustable price leads to less frictional market economy and thus no recession. It approaches the economy described by the neoclassical economics.
Therefore it is to the point that sticky price is discussed related to the role of monetary policy. As some anonymous says, monetary policy is less effectual to cylically finetune the economy if prices are less sticky. It's exactly. If we are in the perfectly competitive economy, we don't need conducting monetary policy and don't have any hardship like recession because the price clears up the market very quickly.
In real world, we face sticky prices and monopolistic competition even if the internet spreads all over us and many people can join the on-line trades where the prices are really adjustable with the demand and supply fluctuating each other.
Perfect competitiveness ends up a great deal of equal firms and thus no severe competition in the market. It's a very happy world, isn't it? There is no McKinsey and no Boston Consulting Group in such an economy,because their clients, major firms in the real economy, must overcome their comparative weaknesses in their market by making strategic decisions of management. The world assumed by Micheal Porter is monopolisticly competitive and is real itself. Here there are some reasons why many have read the Porter's books and the game theory,the theory of strategic decision-making, has been recently noticed in the economic analyses.
What is "monopolistic competition"? Isn't that an oxymoron?
I think "monopolistic competition" is the same thing as an oligopoly.
I don't understand why monopolistic competitino should be the premise of effective monetary policy. Under monopolistic competition couldn't the produce respond to an increase in demand by raising prices? Then hte economy persists below full employment
Thank you for earnest comments,Mr or Ms Anonymous.
Ha-ha, I'll post this issue later. I feel like writing about it. Oh, I have many comments like Greg Mankiw's Blog. What if mvpy,the faithful regular commentator of Greg Mankiw's Blog, should come here?
Let me answer some question:
(1)What is "monopolistic competition"? Isn't that an oxymoron?
Ans. "Monopolistic competition" is the middle between perfect competition and monopoly. In a perfect competition, there are countless firms with no market power to make the price, which mean the "price-takers". And in a monopoly, there is only one firm with the power to control the price and market, which means a "price-maker".
In a monopolistic competition, there are many firms with some market power. They set the price to some extent, but rather make some differences from other competitors in terms of not only the price but also the quality.They usually put emphasis on the quality of the goods and services they produce and compete with the quality rather than the price, when they sell in the market.
By the way, in an oligopoly, there are a few firms with some market power to set the price. However a firm of an oligopoly,which is somewhat different from one of monopoly,can't set the price as it want to. It sets the price, considering the response of its competitor: if it lowers the price, its competitior also will do that and so it will again do more, which leads to the price war because they compete with each other not in quality but in price.
Certainly I confused the term,"monopolistic competition" with the term, oligopoly. It is natural this point has been misread. Yes, it is an oxymoron.
(2)Is "monopolistic competition" the same thing as an oligopoly?
Ans. No, it isn't. "Monopolistic competition" is a little different from oligopoly. Monopolistic competition is the market structure where there are many firms with some market power to make prices.By contrast,"oligopoly" is the market where there are a few firms with stronger market power. The main difference between monopolistic competition and oligopoly is whether firm differentiates the quality from that of its competitor. In an oligopoly, one firm differentiates the price from that of its competitor, whereas in a monopolistic competition a firm differentiates not only the price but the quality. And thus the firm of monopolistic competition can set the price to the extent that it differentiates the quality.
The above answer is written in undergraduate-level economics textbook.
...My answer becomes too long. I'll write about this later.
Can't there be an economic state where prices are not sticky but recessions still arise?
The recession, by assumption, would arise from something like an interdependent supply-demand curve. For example, one firm's capital investment and production decisions presuppose another firm's demand, etc. Because of a coordination problem, the economy reaches an equilibrium below full employment state. I think Keynes writes of this.
Since prices are not sticky, monetary policy would not be effectual.
In this example, fiscal policy would be the approprioate response?
Taro?
"The recession, by assumption, would arise from something like an interdependent supply-demand curve."
If these recessions stem from an interdependent supply-demand curve, then wouldn't the growth patterns of economies have non-linearities? Do you have any evidence of this?
"wouldn't the growth patterns of economies have non-linearities?"
Hmmm. Is this the same thing as the distribution of GDP growth acceleration/deceleration following a power law distribution?
Obviously there could be a recession with non-sticky prices. What do you call a deflationary spiral?!
Good point. The "deflationary spiral" could be an investment shortfall and require a fiscal policy response.
Thank you for constant comments,Mr or Ms Anonymous.
You seem to have a good interest in why a recession occurs. I am also interested in this topic. However modern macroeconomics is more likely to focus on the theory of economic growth rather than on the theory of business cycle.
Lucas, Sargent and Barro, most prominent economists in the world,who were once earnest in the study of business cycle, are now placing emphasis on the research of growth theory.
I think that it is easier to study the growth theory on the ground of ,so-called, micro-foundation: consumers or firms maximize their own objective functions subject to their own constraints.
Modern business cycle theory in general lacks the micro-foundation except Prescott&Kydland's RBC, although the theory of menu cost includes some of maximizations of the agents as a business cycle theory.
Keynesian business cycle theory raises a good question, but can't answer it very well. It is because it lacks micro-foundation. Is there any maximization of the agents in the context of IS-LM analysis?
What causes a recession? No one knows it and find the new alternative explanation.
I'll summarize this issue later in my blog. Hi, Mr or Ms Anonymous, if you know about any researches of this topic, please tell me and give me good advices.
Thank you Mr. Okamoto for your reply.
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