Optimal long-run monetary policy in a monopolistic competition model with industry clusters

Abstract

From the viewpoint of industrial organization, industry clusters are recognized as being crucial to economic development. However, the analysis of monetary policy as portrayed in the existing literature does not seem to consider this feature. This study seeks to make up for this deficiency from the perspective of industrial organization. By considering the feature of industry clusters in a monopolistic competition model, this paper finds that the optimal money growth rate is positively related to the extent of firm cluster congestion, while it is negatively related to the extent of the preference for diversity and the degree of monopoly power.