Customer Markets and the Real Effects of Monetary Policy Shocks

In recent years the New Keynesian Model with price stickiness of the Calvo type has become the most widely used theoretical framework for addressing various normative issues such as how optimal monetary and fiscal policy should be conducted. However, the New Keynesian Model has been criticized for having many severe shortcomings casting doubt on its appropriateness for advising policy makers. The main goal of this doctoral dissertation is the development of alternative dynamic general equilibrium frameworks which are immune to that criticism but are nevertheless able to explain a standard set of business cycles facts at least well as the New Keynesian Model does. In particular, the models proposed in the current monograph provide an endogenous explanation of price stickiness as well as of other important features of the observable data, e.g. the cyclical variation of average markups and the persistence in the reactions to nominal and real shocks. These results are achieved by combining dynamic or static market share competition in the goods market with different assumptions on households? behavior (non-separability of the utility function, inflation aversion, nominal transaction frictions). The monograph is organized as follows. Chapter I provides a brief review of the relevant empirical evidence and discusses the most important shortcomings of the New Keynesian Model. In Chapter II I develop a monetary customer markets model combining dynamic market share competition as proposed by Phelps and Winter (1970) with a non-separable utility function. Chapter III presents a model combining dynamic market share competition with the assumption that agent?s behavior is characterized by inflation aversion. Chapter IV is devoted to the GMM estimation of crucial parameters of the inflation-aversion model of the previous chapter. A model featuring static market share competition and nominal transaction frictions is developed in Chapter V. Chapter VI concludes.