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Firm entry, competitive pressures and the US inflation dynamics

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  • Martina Cecioni

    ()
    (Bank of Italy)

Abstract

This paper studies the effect of competitive pressures on inflation dynamics. To this end it derives and estimates a New Keynesian Phillips curve in a model with endogenous firm entry. The number of active firms is inversely related to their market power. By taking into account the number of competitors, the pass-through of real marginal cost on inflation is separately identifiable from the effect of endogenous desired markup fluctuations. Estimates with US data suggest that the effect of real marginal cost on inflation is stronger than that found in the empirical test of the standard model. The estimated elasticity of the desired markup with respect to the number of firms implies that an increase of 10% in the number of active firms would lower annual inflation by 1.4% in the short run.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 773.

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Date of creation: Sep 2010
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Handle: RePEc:bdi:wptemi:td_773_10

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Web page: http://www.bancaditalia.it
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Related research

Keywords: inflation dynamics; markups; firm entry;

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References

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  1. David E. Altig & Lawrence J. Christiano & Martin Eichenbaum & Jesper Linde, 2004. "Firm-specific capital, nominal rigidities, and the business cycle," Working Paper 0416, Federal Reserve Bank of Cleveland.
  2. colciago, andrea & Rossi, Lorenza, 2011. "Endogenous Market Structures and the Business Cycle," MPRA Paper 29629, University Library of Munich, Germany.
  3. Luca Guerrieri & Christopher Gust & David López-Salido, 2008. "International competition and inflation: a New Keynesian perspective," International Finance Discussion Papers 918, Board of Governors of the Federal Reserve System (U.S.).
  4. Paul Bergin & Giancarlo Corsetti, 2005. "Towards a theory of firm entry and stabilization policy," Economics Working Papers ECO2005/24, European University Institute.
  5. Peter N. Ireland, 2000. "Sticky-Price Models of the Business Cycle: Specification and Stability," NBER Working Papers 7511, National Bureau of Economic Research, Inc.
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  7. Jeffrey Campbell, 2000. "Market Size Matters," Econometric Society World Congress 2000 Contributed Papers 1225, Econometric Society.
  8. Bilbiie, Florin Ovidiu & Ghironi, Fabio & Melitz, Marc J, 2011. "Endogenous Entry, Product Variety, and Business Cycles," CEPR Discussion Papers 8564, C.E.P.R. Discussion Papers.
  9. FAME,Eric Jondeau, University of Lausanne-HEC & Jean Imbs & Eric Jondeau & Florian Pelgrin, 2006. "Aggregating Phillips Curves," Computing in Economics and Finance 2006 314, Society for Computational Economics.
  10. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers 0284, National Bureau of Economic Research, Inc.
  11. Julio J. Rotemberg & Michael Woodford, 1999. "The Cyclical Behavior of Prices and Costs," NBER Working Papers 6909, National Bureau of Economic Research, Inc.
  12. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2008. "Monetary Policy and Business Cycles with Endogenous Entry and Product Variety," NBER Chapters, in: NBER Macroeconomics Annual 2007, Volume 22, pages 299-353 National Bureau of Economic Research, Inc.
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  14. Steinsson, Jon, 2003. "Optimal monetary policy in an economy with inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(7), pages 1425-1456, October.
  15. Jaimovich, Nir & Floetotto, Max, 2008. "Firm dynamics, markup variations, and the business cycle," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1238-1252, October.
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Cited by:
  1. Vivien Lewis & Céline Poilly, 2011. "Firm entry, inflation and the monetary transmission mechanism," Working Paper Research 211, National Bank of Belgium.
  2. Pierpaolo Benigno & Ester Faia, 2010. "Globalization, Pass-Through and Inflation Dynamics," Kiel Working Papers 1604, Kiel Institute for the World Economy.
  3. Henning Weber, 2011. "Optimal inflation and firms' productivity dynamics," Kiel Working Papers 1685, Kiel Institute for the World Economy.

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