Dynamic macroeconomics with imperfect competition (Q1808062)

The starting point of Kaas' book is the basic question of how to integrate price setting firms in a dynamic disequilibrium model. Recent literature on imperfect competition in macroeconomics answers by mainly applying the objective demand approach, that is, assuming that firms know the true demand curve they are faced with. This approach can be applied in temporary monetary equilibrium models, but it proves to be inadequate for formulating price adjustment in a dynamic disequilibrium model, where it has to be replaced by the concept of subjective demand. Based on this distinction, Kaas' book starts out with a comparison of the concepts of subjective and objective demand in an abstract framework, and surveys the literature on general equilibrium theory with imperfect competition. The objective demand approach is criticized not only on the grounds of its strong rationality requirements and existence problems, but also by the observation that it cannot be applied successfully to characterize determinate rational expectations equilibria in intertemporal macroeconomics. Finally, price setting firms using subjective demand functions are integrated in a dynamic disequilibrium model in order to study monopolistic and oligopolistic price adjustment. We recommend Leo Kaas' book to all researchers interested in mathematical economics.