CIRJE-F-115. Fukuda, Shin-ichi, "A Model of Keynesian under Knightian Uncertainty", May 2001.

The purpose of this paper is to explore a source of nominal price rigidity and non-neutrality of money in a model of monopolistic competition under Knightian uncertainty. The decision-making theory in the analysis is that of expected utility under a nonadditive probability measure, that is, the Choquet expected utility model of preference. We apply this decision theory to a model of monopolistic competition without fixed cost of price adjustment. We show that when aversion to Knightian uncertainty exists, nominal price becomes rigid in a model of monopolistic competition. The model therefore has a Keynesian feature that nominal disturbances, particularly anticipated changes of money supply, have real effects on aggregate output fluctuations. The feature holds even if aversion to Knightian uncertainty is very small.