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The extensive margin and monetary policy

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  • Bergin, Paul R.
  • Corsetti, Giancarlo

Abstract

The creation of new firms, referred to as the extensive margin, is a significant but overlooked dimension of monetary policy. A monetary VAR documents that monetary policy has significant effects on firm creation. An analytically tractable model combining sticky prices and firm entry shows that entry alters the transmission of monetary policy innovations, acting much like a type of investment in more standard models. Monetary policy rules that offset the uncertainty of productivity shocks can raise the mean level of entry and thereby welfare, suggesting a new motivation for stabilization policy.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 55 (2008)
Issue (Month): 7 (October)
Pages: 1222-1237

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Handle: RePEc:eee:moneco:v:55:y:2008:i:7:p:1222-1237

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Web page: http://www.elsevier.com/locate/inca/505566

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Keywords: Productivity Monetary policy Market dynamics;

References

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  1. V. V Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 533-563.
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  13. Paul Bergin & Giancarlo Corsetti, 2005. "Towards a theory of firm entry and stabilization policy," Economics Working Papers ECO2005/24, European University Institute.
  14. Giancarlo Corsetti & Paolo Pesenti, 2005. "The Simple Geometry of Transmission and Stabilization in Closed and Open Economies," NBER Working Papers 11341, National Bureau of Economic Research, Inc.
  15. Vivien Lewis, 2006. "Macroeconomic fluctuations and firm entry: theory and evidence," Computing in Economics and Finance 2006 112, Society for Computational Economics.
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  17. Eichenbaum, Martin & Evans, Charles L, 1995. "Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 975-1009, November.
  18. Steven J. Davis & John Haltiwanger, 1990. "Gross Job Creation and Destruction: Microeconomic Evidence and Macroeconomic Implications," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 123-186 National Bureau of Economic Research, Inc.
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