Investment and the Inflation-Unemployment Trade-off in a Macroeconomic Rationing Model with Monopolistic Competition

This paper develops a stylized macroeconomic rationing (or disequilibrium) model where the three well-known regimes of Keynesian Unemployment, Classical Unemployment and Repressed Inflation’ are explicitly distinguished and wherein prices and the capital stock are endogenously determined by profit maximizing firms. The framework is one of monopolistic competition. The macroeconomic price and employment relationships are derived by explicit aggregation over individual firms. Because different firms can be in different regimes, the three regimes mentioned above always coexist at the aggregate level and do so in proportions that may vary through time. This is exactly the picture conveyed by business survey results. As a result of competition, the number of firms, hence the aggregate production capacity, adjusts in the long run until pure profits are equal to zero.