Introduction

Recent years have seen a rapidly growing development of macroeconomic models based on imperfect competition. A strong point of these models is that they are able to generate inefficient macroeconomic equilibria, obviously an important characteristic nowadays, while maintaining rigorous microfoundations. Indeed in these models both price and quantity decisions are made rationally by maximizing agents internal to the system, which thus differentiates them from Keynesian models, where the price formation process is a priori given, and also from classical (i.e. Walrasian) models, where the job of price-making is left to the implicit auctioneer.

Since for many years the macroeconomic debate has been dominated by the ‘classical versus Keynesian’ opposition, a question often posed by various authors, both inside and outside the domain, is whether these macroeconomic models with imperfect competition have more ‘classical’ or ‘Keynesian’ properties. The debate on this issue has sometimes become rather muddled and the purpose of this chapter is to give a few basic answers in a simple and expository way. This we shall do not by reviewing all contributions to the subject (there are already two excellent review articles, by Dixon and Rankin, 1994 and Silvestre, 1993), but by constructing a simple ‘prototype’ model with rigorous microfoundations, including notably rational expectations and objective demand curves, and examining how its various properties relate to those of Keynesian and classical models.