Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity
Julio J. Rotemberg
We construct a dynamic general equilibrium model in which the typical
industry colludes by threatening to punish deviations from an implicitly agreed
upon pricing path. We argue that models of this type explain better than do
competitive models the way in which the economy responds to aggregate demand
shocks. When we calibrate a linearized version of the model using methods
similar to those of Kydland and Prescott (1982), we obtain predictions
concerning the economy's response to changes in military spending which are
close to the response we estimate with postwar US data.
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