Imperfect Competition and Macroeconomics: A Survey.

This survey outlines the general lessons of recent literature on imperfectly competitive macroeconomics for the theory of monetary and fiscal policy. A general framework is presented which nests most of the existing literature. Although money is of itself neutral, the presence of menu costs, non-unit-elastic expectations, or sectoral nominal rigidities results in an output- and welfare-increasing role for monetary policy. Imperfect competition alone is enough for fiscal policy to affect output but, without monetary nonneutrality, the effect is as likely to be negative as positive. Nevertheless, fiscally induced output increases are likely to be welfare increasing, unlike in competitive economies. Copyright 1994 by Royal Economic Society.