M. OTAKI ET AL.
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117
** ***
()(), (0,1],
MW
Vy Vyy
where *
V is the utility of each individual in the mo-
nopolistic competition, and is that in the Walrasian
equilibrium.
*
W
V
Inflation, which makes the Walrasian equilibrium dy-
namically inefficient, is a true social cost incurred from
using money, and hence, the monopolistic competition
can contribute to the economic welfare through a reduc-
tion in such cost.
In addition, the gain obtained by the monopolistic
competition is actually attributed to the monopoly rent
*
*
t
t
P
, because the real reservation wage is reduced by the
disinflation as appears in Equation (16). It is also note-
worthy that although the increasing marginal cost is the
only cause of underemployment in the static monopolis-
tic competition model, it is not a crucial factor in the
dynamic model as long as the fiscal monetary policy is
properly executed.
4. Concluding Remarks
This paper investigated the dynamic role of the monop o-
listic competition in the monetary economy. The follow-
ing results are obtained.
First, the monopolistic competition lowers the infla-
tion rate. This is because the monopolistic power in-
creases the current price level relative to the future price
level, which is woven into the nominal reserv ation wage.
Second, the monopolistic competition weakly domi-
nates the Walrasian equilibrium in resource allocation. If
coordination between generations is possible, the marginal
transformation rate is unity. In the monetary economy, how-
ever, decision making is diversified with each generation.
Hence, there is no guarantee that the inflation rate is
equal to the marginal transformation rate, except for in
the special case. As compared to the social optimum, the
current consumption becomes too large under inflation.
Thus, inflation is the deadweight loss intrinsic to the
mon eta r y e co no my. To su m u p, th e mo no po lis ti c c omp e -
tition contributes to economic welfare through a reduc-
tion in the inflation rate.
It is also noteworthy that the sou rce of distortion sh ifts
from the relative price between the goods and leisure in
statics to the intertemporal relative price of the goods in
dynamics. The welfare-economic results of the dynamic
monopolistic competition contrast sharply with those of
the preceding static analyses.
5. References
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