Imperfect competition, differential information, and microfoundations of macroeconomics

The past two decades witnessed a substantial change in the field of macroeconomics. The fall of the Keynesian approach after the inflationary episode of the 1970s was followed by the rise of the New Classical approach, but the new Classical approach was overtaken in the 1980s by the Real Business Cycle and new Keynesian approaches. The driving force behind the change is a desire for a sound macroeconomic foundation for macroeconomic theory. This volume links a macroeconomic model of imperfectly informed firms and unions in monopolistic competition to a general theory of wage- and price-setting in a macroeconomic model. The analysis is based on a profit maximization and rational behaviour and is thus in line with the new Keynesian approach in its emphasis on the importance of imperfect competition in explaining macroeconomic phenomena. However, it explicitly considers the confounding effect of informational imperfection on prices and quantities, which was largely neglected in the New Keynesian approach of the 1980s. The volume goes on to explain three stylized facts in macroeconomics: nominal rigidity, real rigidity, and cost-orientated prices, presented in a coherent New Keynesian framework. The analysis also provides new insight into the role of competition in an economy with imperfectly and differentially informed firms. It shows that increased competition may increase nominal as well as real price rigidity and volatility of investment.