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Multiple Equilibria and Interfirm Macro-Externality: An Analysis of Sluggish Real Adjustment

Author

Listed:
  • Yew-Kwang Ng

    (Faculty of Business and Economics, Monash University)

  • Ying Wu

    (Department of Economics and Finance, Franklin P. Perdue School of Business Salisbury University)

Abstract
In an imperfectly competitive economy, a continuum of equilibria at the firm level exists under certain analytical conditions (Ng 1986). Extending the earlier analysis of a representative firm, this paper shows that even if the condition for a continuum of equilibria is not exactly satisfied, the factors of price-adjustment costs, interfirm heterogeneity, and macro-externality can cause the economy to be stuck at the quasi macroequilibria after aggregate demand experiences a contractionary shock. Although adjustment costs are small and gains from adjustment are potentially large, the adjustment tends to be sluggish due to the existence of interfirm macro-externality.

Suggested Citation

  • Yew-Kwang Ng & Ying Wu, 2004. "Multiple Equilibria and Interfirm Macro-Externality: An Analysis of Sluggish Real Adjustment," Annals of Economics and Finance, Society for AEF, vol. 5(1), pages 61-77, May.
  • Handle: RePEc:cuf:journl:y:2004:v:5:i:1:p:61-77
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Imperfect competition; Externality; Adjustment cost; Aggregate demand;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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