Beiträge zur Jahrestagung des Vereins für Socialpolitik 2010: Ökonomie der Familie - Session: Monetary Policy Under Uncertainty C16-V1
As is well known, one of the major shortcomings of the New Keynesian model (NKM) with Calvo-type price setting is the lack of a microeconomic foundation of its most important building block - price stickiness. In this paper I investigate the ability of a monetary Customer Markets model to provide the desired microeconomic foundation and to serve as an alternative to the New Keynesian approach for analyzing positive as well as normative issues. In particular, I extend a standard monetary business cycles model with fully flexible prices along two dimensions: market share competition as proposed by Phelps and Winter (1970) and non-separability of the utility function with respect to money and consumption. For a broad range of empirically plausible parameter values the monetary nonneutrality generated by the Customer Markets model is of similar magnitude and persistence as that implied by the NKM. Furthermore, as revealed by a detailed comparison between the two frameworks, the theory developed in this paper explains a standard set of business cycles facts at least as well as the NKM does.