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Monopolistic Competition, Precautionary Savings, Coordination Failure

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  • Maruyama, Yuuki

Abstract

By using the concept of precautionary savings instead of the life-cycle hypothesis in a model of monopolistic competition, this paper shows that recessions can occur even when prices are flexible. In this model, when buying goods, consumers face trade-offs not only with purchasing other goods but also with saving. Producers consider this and strategically determine prices and outputs. In this case, if consumers’ precautionary saving motive increases, coordination failure occurs and the aggregate supply decreases. In simple words, this is because the demand curve shrinks to the left instead of down.

Suggested Citation

  • Maruyama, Yuuki, 2020. "Monopolistic Competition, Precautionary Savings, Coordination Failure," SocArXiv t836n_v1, Center for Open Science.
    • Handle: RePEc:osf:socarx:t836n_v1
    DOI: 10.31219/osf.io/t836n_v1
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    References listed on IDEAS

    as
    1. Caballero, Ricardo J., 1990. "Consumption puzzles and precautionary savings," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 113-136, January.
    2. Kimball, Miles S & Mankiw, N Gregory, 1989. "Precautionary Saving and the Timing of Taxes," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 863-879, August.
    3. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-666, September.
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