MONEY SUPPLY VARIABILITY IN A MACRO MODEL OF MONOPOLISTIC COMPETITION

Authors

  • Ronald J. Balvers

    Search for more papers by this author
    • *Assistant Professor, University of Notre Dame. I thank Jeff Bergstrand, Tom Bundt, George Catsiapis, Andy Criswell, Terri Gollinger, Gene Gruver, George Hendrikse, Ed Trubac, and especially Norm Miller, Richard Sweeney and two anonymous referees for valuable comments. The research support of the Business Partners Fund and the Center for Research in Banking at the University of Notre Dame is gratefully acknowledged.


Abstract

The effects of changes in money supply variability are examined for a macro model of monopolistic competition. Increases in money supply variability raise demand uncertainty causing individual firms to produce more for inventory. In addition, expected profits decrease, inducing a number of firms to leave the economy. Aggregate income then falls in spite of an increase in firm-level production. The result on aggregate income is standard, but the results on inventories and the number of firms in the economy distinguish this monopolistic macro model empirically from conventional macro models when changes in money supply variability occur.

Ancillary