Entry of firms and cost of disinflation in New Keynesian models (original) (raw)
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This paper analyses a small open economy Ramsey model with an endogenous labor supply and no capital. The number of firms is subject to adjustment costs, so that the entry dynamics is determined endogenously. We find that with imperfect competition, there is a first order effect of a demand shock which is absent in the Walrasian equivalent. We solve and analyse the dynamic model for permanent and temporary demand shocks.
Monetary policy with endogenous firm entry
2007
This paper explores a new channel for the transmission of monetary policy through the extensive margin. In this paper, a shock to money induces firms to enter by affecting a measure of Tobin's Q: the ratio of expected future profits to entry costs. In a dynamic stochastic general equilibrium setting, though, optimal consumption smoothing limits the flow of entering firms. As a result, the model generates positively correlated, persistent and hump-shaped responses of output, consumption and firm entry to monetary shocks, as observed in the data. This is obtained via an endogenous source of inertia and despite minimal nominal rigidities, as only one-time entry costs-as opposed to goods prices or wages-are assumed to be sticky. * Thanks first and foremost to Cédric Tille for his guidance, insights and encouragements. Sincere thanks also to Richard Baldwin,
Entry and stationary equilibrium prices in a post-keynesian growth model
2000
A peculiar feature of the post-keynesian growth theory is its focus on the growth objective of the firm and the price implications of this objective (see, e.g. Kregel and Eichner (1975), Shapiro (1981)). The post-keynesian view of price formation, as canonically represented by the mark up theory, is essentially different from the neoclassical one as the prices are essentially long
Journal of Development Economics, 1988
Brazil, Argentina and Israel all used price controls as part of disinflation programs in [1985][1986]. In each case they were intended to break an "inertial" component of inflation. This paper focuses on a specific mechanism through which inflation inertia can emerge: the interaction between lack of credibility of government monetary policy announcements and the price setting behavior of forward looking firms. We show that this interaction can lead to inertia extending well beyond the price setting period; that is important since the price setting period is likely to be short in high inflation economies.
Entry costs and the dynamics of business formation
Journal of Macroeconomics, 2015
This paper studies the implications of entry costs for business formation in a dynamic stochastic general equilibrium model with endogenous entry and exit. The paper first documents some facts about business formation in the US. Exit is more volatile than entry, both are more volatile than output and co-move over the cycle. Firms are less volatile than output and pro-cyclical. Then, it shows that a model with entry and exit can replicate these facts fairly well. In addition it captures important features of the US business cycle, outperforming models with a fixed exit rate and a fixed number of firms. The performance of the model is sensitive to changes in the composition of entry costs.
2008
This paper introduces adaptive learning and endogenous indexation in the New-Keynesian Phillips curve and studies disinflation under inflation targeting policies. The analysis is motivated by the disinflation performance of many inflation-targeting countries, in particular the gradual Chilean disinflation with temporary annual targets. At the start of the disinflation episode price-setting firms’ expect inflation to be highly persistent and opt for backwardlooking indexation. As the central bank acts to bring inflation under control, price-setting firms revise their estimates of the degree of persistence. Such adaptive learning lowers the cost of disinflation. This reduction can be exploited by a gradual approach to disinflation. Firms that choose the rate for indexation also re-assess the likelihood that announced inflation targets determine steady-state inflation and adjust indexation of contracts accordingly. A strategy of announcing and pursuing short-term targets for inflation ...
Limited participation or sticky prices? New evidence from firm entry and failures
2008
Traditional models of monetary transmission such as sticky prices and limited participation abstract from firm creation and destruction. Only a few papers look at the empirical effects of the monetary shock on the firm turnover measures. But what can we learn about monetary transmission by including measures for firm turnover into the theoretical and empirical models? Based on a large scale vector autoregressive (VAR) model for the U.S. economy I show that a contractionary monetary policy shock increases the number of business bankruptcy filings and failures, and decreases the creation of firms and net entry. According to the limited participation model, a contractionary monetary shock leads to a drop in the number of firms. On the contrary the same shock in the sticky price model increases the number of firms. Therefore the empirical findings support more the limited participation type of the monetary transmission.
Firms' entry, monetary policy and the international business cycle
Journal of International Economics, 2013
This article appeared in a journal published by Elsevier. The attached copy is furnished to the author for internal non-commercial research and education use, including for instruction at the authors institution and sharing with colleagues.
Towards a Theory of Firm Entry and Stabilization Policy
2005
This paper studies the role of stabilization policy in a model where firm entry responds to shocks and uncertainty. We evaluate stabilization policy in the context of a simple analytically solvable sticky price model, where firms have to prepay a fixed cost of entry. The presence of endogenous entry can alter the dynamic response to shocks, leading to greater persistence