Modelling the Effect of Macroeconomic Rigidities on Market Competition in Sierra Leone

This paper explores the intricate relationship between macroeconomic indicators and imperfect competition in Sierra Leone, employing a prototype of an imperfect competition structural model within the New Keynesian framework. The model incorporates nominal and real rigidities, as well as market failures. Results indicate that Sierra Leone’s imperfectly competitive market introduces inefficiencies, leading to a muted initial impact of productivity shocks on macroeconomic variables. Wages and real interest rates exhibit moderated adjustments due to deviations from perfect competition ideals, dampening the effects on investment, consumption, and output. Policy and transition functions reveal a lasting influence of past capital accumulation and external shocks on aggregate output. The analysis exposes inertia in investment decisions and strategic actions of dominant firms. Steady-state results affirm a stable equilibrium in Sierra Leone, and eigenvalues exceeding unity underscore the model’s ability to capture anticipatory behavior in imperfect market competition. The correlation matrix highlights profound connections between economic activity, wages, and capital’s role in growth. Theoretical moments demonstrate economic indicator variability, emphasizing dominant firms’ influence on capital allocation and policy measures’ role in stabilizing interest rates and labor markets. The covariance matrix of exogenous shocks underscores external influences’ persistence and correlated impacts on Sierra Leone’s economy. These findings stress the importance of tailored policy responses to address market imperfections, advocating for measures to promote competition, labor market flexibility, dynamic investment, and stabilization of interest rates and labor markets.