We develop a general equilibrium model of monopolistic competition with a traded and a non-traded sector. Using a broad class of homothetic preferences - that generate variable markups, display a simple behavior of their elasticity of substitution, and nest the ces as a limiting case - we show...

The correlation between persistent changes in the markup in one sector of an economy and the inflation rate is quantified in a 2-sector dynamic general equilibrium model. How this relationship is affected by monetary policy is also studied. We find that the correlation is in general positive...

This paper shows that the degree of competition affects the current account response to nominal shocks. The mechanism hinges on the relationship between the mark-up and the degree of real rigidity of prices. In a model with intermediate goods, the degree of real rigidity increases in the markup....