MONEY SUPPLY VARIABILITY IN A MACRO MODEL OF MONOPOLISTIC COMPETITION

The effects of changes in money supply variability are examined for a macro model of monopolistic competition. Increases in money supply variability raise demand uncertainty causing individual firms to produce more for inventory. In addition, expected profits decrease, inducing a number of firms to leave the economy. Aggregate income then falls in spite of an increase in firm‐level production. The result on aggregate income is standard, but the results on inventories and the number of firms in the economy distinguish this monopolistic macro model empirically from conventional macro models when changes in money supply variability occur.