Multiple equilibria and interfirm macro-externality: An analysis of sluggish real adjustment

Yew Kwang Ng, Ying Wu

Research output: Contribution to journalArticleResearchpeer-review

4 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)61-77
Number of pages17
JournalAnnals of Economics and Finance
Volume5
Issue number1
Publication statusPublished - 1 May 2004

Keywords

  • Adjustment cost
  • Aggregate demand
  • Externality
  • Imperfect competition

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