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A Comparison of Menu Costs in Open and Closed Economies with a Mixed Industrial Structure

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  • Huw Dixon
  • Alberto Pompermaier

Abstract

In this paper we develop Dixon and Hansen (1997) to allow for two-sector small open economy in which the non-traded sector is monopolistic. The closed economy version of the model generalises Dixon/Hansen to allow for diminishing returns on the traded sector. We compare the short-run impact of menu costs on the economy and also the size of menu costs needed to sustain nominal rigidity in both the open and closed economies. We find that whilst the welfare gains from monetary expansion are of a similar magnitude, nominal rigidity can occur for much smaller menu costs than in the closed economy case. Hence we argue that menu costs and the resultant nominal rigidities are more likely to be important in an open economy. Copyright Kluwer Academic Publishers 1999

Suggested Citation

  • Huw Dixon & Alberto Pompermaier, 1999. "A Comparison of Menu Costs in Open and Closed Economies with a Mixed Industrial Structure," Open Economies Review, Springer, vol. 10(4), pages 365-384, October.
    • Handle: RePEc:kap:openec:v:10:y:1999:i:4:p:365-384
    DOI: 10.1023/A:1008329530140
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    More about this item

    Keywords

    menu costs; open economy; welfare; monopolistic competition;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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