Dynamic General Equilibrium Models With Imperfectly Competitive Product Markets (Classic Reprint)

Dynamic General Equilibrium Models with Imperfectly Competitive Product Markets Julio J. Rotemberg Michael Woodford Massachusetts Institute ofT echnology University of Chicago October 13, 1993 Abstract This paper discusses the consequences of introducing imperfectly competitive product markets into an otherwise standard neoclassical growth model. We pay particular attention to the consequences of imperfect competition for the explanation of fluctuations in aggregate economic activity. Market structures considered include monopolistic competition, the customer mjirket model of Phelps and Winter, and the implicit collusion model of Rotemberg andS aloner. Empirical evidence relevant to the numerical calibration of imperfectly competitive models is reviewed. The paper then analyzes the effects of imperfect competition upon the economys response to several kinds of real shocks, including technology shocks, shocks to the level of government purchases, and shocks that change individual producers degree of market power. It also discusses the role of imperfect competition in allowing for fluctuations due solely to self-fulfilling expectations. We wish to thank David Backus, Roland Benabou and participants at the Frontiers of Business Cycle Research for comments, Stephcinie Schmitt-G rohe and Martin Uribe for research iissistcince and the NSF for research support.
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