Underemployment Equilibrium with Rational Expectations

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Abstract
In this paper I use some recent work in the microeconomics of imperfect information to construct a macro model. The microeconomic theory suggests that atomistically competitive firms face kinked demand curves. In this model there is a range of aggregate equilibria consistent with correct information. I then show that individual firms can face a free-rider problem in trying to move from one equilibrium to another by changing the price level. Monetary policy is not subject to this problem, even if the policy is fully anticipated.

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