Hostname: page-component-78c5997874-dh8gc Total loading time: 0 Render date: 2024-11-06T04:03:03.286Z Has data issue: false hasContentIssue false
  • English
  • Français

OPTIMAL MONETARY POLICY AND FIRM ENTRY

Published online by Cambridge University Press:  30 August 2012

Vivien Lewis
Vivien Lewis*
Affiliation:
Ghent University and IMFS, Goethe University Frankfurt
*
Address correspondence to: Vivien Lewis, Center for Economic Studies, Catholic University Leuven, Naamsestraat 69, 3000 Leuven, Belgium; e-mail: [email protected]; URL: http://sites.google.com/site/vivienjlewis.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper characterizes optimal monetary policy in an economy with endogenous firm entry, a cash-in-advance constraint, and preset wages. Firms must make profits to cover entry costs; thus the markup on goods prices is efficient. However, because leisure is not priced at a markup, the consumption–leisure trade-off is distorted. Consequently, the real wage, hours, and production are suboptimally low. Because of the labor requirement for entry, insufficient labor supply also implies that entry is too low. This paper shows that in the absence of fiscal instruments such as labor income subsidies, the optimal monetary policy achieves higher welfare under sticky wages than under flexible wages. The policy maker uses the money supply instrument to raise the real wage—the cost of leisure—above its flexible-wage level, in response to expansionary shocks to productivity and entry costs. This increases labor supply, expanding production and firm entry.

Keywords

EntryOptimal Monetary PolicySticky Wages
Type
Articles
Information
Macroeconomic Dynamics , Volume 17 , Issue 8 , December 2013 , pp. 1687 - 1710
Copyright
Copyright © Cambridge University Press 2012 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Adão, Bernadino, Correia, Isabel, and Teles, Pedro (2003) Gaps and triangles. Review of Economic Studies 70 (4), 699–713.CrossRefGoogle Scholar
Barseghyan, Levon and DiCecio, Riccardo (2011) Entry costs, industry structure, and cross-country income and TFP differences. Journal of Economic Theory 146 (5), 1828–1851.CrossRefGoogle Scholar
Berentsen, Aleksander and Waller, Christopher (2009) Optimal Stabilization Policy and Endogenous Firm Entry. Manuscript, University of Basel, University of Notre Dame, and FRB-St. Louis.CrossRefGoogle Scholar
Bergin, Paul R. and Corsetti, Giancarlo (2008) The extensive margin and monetary policy. Journal of Monetary Economics 55 (7), 1222–1237.CrossRefGoogle Scholar
Bilbiie, Florin, Fujiwara, Ippei, and Ghironi, Fabio (2011) Optimal Monetary Policy with Endogenous Product Variety. CEPR discussion paper 8565.CrossRefGoogle Scholar
Bilbiie, Florin, Ghironi, Fabio, and Melitz, Marc(2007) Monetary policy and business cycles with endogenous entry and product variety. NBER Macroeconomics Annual 22.Google Scholar
Bilbiie, Florin, Ghironi, Fabio, and Melitz, Marc(2008) Monopoly Power and Endogenous Variety in Dynamic General Equilibrium: Distortions and Remedies. NBER working paper 14383.Google Scholar
Broda, Christian and Weinstein, David E. (2010) Product creation and destruction: Evidence and price implications. American Economic Review 100 (3), 691–723.CrossRefGoogle Scholar
Chamley, Christophe (1986) Optimal taxation of capital income in general equilibrium with infinite lives. Econometrica 54 (3), 607–622.CrossRefGoogle Scholar
Correia, Isabel, Nicolini, Juan Pablo, and Teles, Pedro(2008) Optimal fiscal and monetary policy: Equivalence results. Journal of Political Economy 116 (1), 141–170, 02.CrossRefGoogle Scholar
Dixit, Avinash K. and Stiglitz, Joseph E. (1977) Monopolistic competition and optimum product diversity. American Economic Review 67 (3), 297–308.Google Scholar
Erceg, Christopher J., Henderson, Dale W., and Levin, Andrew T. (2000) Optimal monetary policy with staggered wage and price contracts. Journal of Monetary Economics 46 (2), 281–313.CrossRefGoogle Scholar
Faia, Ester (in press) Oligopolistic competition and optimal monetary policy. Journal of Economic Dynamics and Control.Google Scholar
Ireland, Peter N. (1996) The role of countercyclical monetary policy. Journal of Political Economy 104 (4), 704–723.CrossRefGoogle Scholar
Kim, Jinill (2004) What determines aggregate returns to scale? Journal of Economic Dynamics and Control 28 (8), 1577–1594.CrossRefGoogle Scholar
Lewis, Vivien (2009) Business cycle evidence on firm entry. Macroeconomic Dynamics 13 (5), 605–624.CrossRefGoogle Scholar
Lewis, Vivien (2010) Product Diversity, Strategic Interactions and Optimal Taxation. Manuscript, Ghent University.Google Scholar
Lewis, Vivien and Poilly, Céline (2011) Firm Entry, Markups and the Monetary Transmission Mechanism. Manuscript, Ghent University and University of Lausanne.CrossRefGoogle Scholar