MACROECONOMICS OF MONOPOLISTIC COMPETITION (TRADE EXTERNALITIES, MULTIPLE EXPECTATIONAL EQUILIBRIA, INDUSTRIAL POLICY)

This thesis develops macroeconomic models of monopolistic competition in order to study failures of coordination, mechanisms of business cycles, and the effects of government policies toward investment, production and international trade.;Chapter II constructs a two-period model of monopolistic competition with real investment. We show that the economy can have multiple rational expectations equilibria if the production technology exhibits increasing returns to scale. We also demonstrate that an equilibrium characterized by optimistic expectations of future demand generally Pareto dominates a pessimistic expectational equilibrium. Furthermore, a government insurance program can be designed to attain an optimistic expectational equilibrium.;Chapter III examines industrial policy effects in the presence of intra-industry trade. We present a two-sector model of international trade, where in one sector differentiated goods are produced under monopolistic competition, while in the other sector a homogeneous good is produced competitively. We show that when the south, a net importer of differentiated goods, subsidizes the production of differentiated goods, the south will gain from both an improvement in resource allocation and an improved terms of trade. This result represents a departure from the traditional, competitive two-sector model. We find that the effects of an import tariff and/or export subsidy in the presence of intra-industry trade are also different from the implications of the traditional model.;Chapter 1 investigates problems of coordination, such as the underemployment of labor, using a static macroeconomic model of monopolistic competition. This chapter demonstrates that, in a monopolistically competitive economy, aggregate demand contains elements of a public good. Specifically, each firm can increase aggregate demand by lowering its price, while no firm can capture all of its own impact on aggregate demand. We argue that, because of these public goods elements, the non-cooperative, monopolistically competitive economy fails to solve coordination problems.