MACROECONOMICS WITH NON‐PERFECT COMPETITION: TAX CUTS AND WAGE INCREASES*

Abstract

In a recent paper, Ng [3] introduces non-perfect competition (imperfect competition and monopoly) into a simple macroeconomic model with no government, no time lags, no misinformation, etc. Under perfectly competitive assumptions that model gives the customary result that changes in (nominal) aggregate demand (introduced by changing the money supply) affect only nominal variables. Under conditions of non-perfect competition, such changes may affect real output and employment depending upon the elasticities of the marginal cost curve and of the (inverse) labour supply curve, and the expectations of firms. Under a specific set of conditions (involving labour supply and marginal cost curves that are horizontal, or whose elasticities are otherwise related in a particular way), if firms expect no price response then changes in aggregate demand affect only real variables, confirming expectations. However, since this set of conditions is stringent, Ng himself notes that it is unsafe to advocate expansionary policies on the basis of his anti-classical result, even in the presence of unemployment. Nevertheless contractionary counterinflationary policies based purely on demand management are also unsafe as they may reduce real output without affecting the price level.