Market clearing with some neo-Keynesian features

Abstract

The dynamics of a closed, constant returns, multimarket, monopolistically competitive economy in market clearing equilibrium are examined under two triggers for change: the advent of a new technology and a change in relative prices of inputs. Both warrant costly adjustment in input quantities. Equilibrium in capital markets results in relative price rigidity within markets. In markets characterized by lower cost of capital, agents do not adopt the new technology. In other markets they do. Only three specifications of adjustment cost are feasible and the shortest time path of output is S-shaped with a cyclical component. The pattern of co-movement of variables is broadly consistent with the stylized facts. (c) 2006 Elsevier Inc. All rights reserved.