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Microentrepreneurship and the business cycle: is self-employment a desired outcome?

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  • Federico S. Mandelman
  • Gabriel V. Montes Rojas

Abstract

Should a central bank accommodate energy price shocks? Should the central bank use core inflation or headline inflation with the volatile energy component in its Taylor rule? To answer these questions, we build a dynamic stochastic general equilibrium model with energy use, durable goods, and nominal rigidities to study the effects of an energy price shock and its impact on the macroeconomy when the central bank follows a Taylor rule. We then study how the economy performs under alternative parameterizations of the rule with different weights on headline and core inflation after an increase in the energy price. Our simulation results indicate that a central bank using core inflation in its Taylor rule does better than one using headline inflation because the output drop is less severe. In general, we show that the lower the weight on energy price inflation in the Taylor rule, the impact of an energy price increase on gross domestic product and inflation is also lower.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2007-15.

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Date of creation: 2007
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Handle: RePEc:fip:fedawp:2007-15

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  1. Maloney, William F, 1999. "Does Informality Imply Segmentation in Urban Labor Markets? Evidence from Sectoral Transitions in Mexico," World Bank Economic Review, World Bank Group, vol. 13(2), pages 275-302, May.
  2. Hugo Ñopo & Patricio Valenzuela, 2007. "Becoming an Entrepreneur," Research Department Publications 4519, Inter-American Development Bank, Research Department.
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  4. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August.
  5. Evans, David S, 1987. "Tests of Alternative Theories of Firm Growth," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 657-74, August.
  6. Carrasco, R., 1997. "Transitions to and from Self-Employment in Spain: An Empirical Analysis," Papers 9710, Centro de Estudios Monetarios Y Financieros-.
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  8. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
  9. Gabriel V. Montes Rojas & Lucas Siga, 2009. "On the nature of micro-entrepreneurship: evidence from Argentina," Applied Economics, Taylor & Francis Journals, vol. 41(21), pages 2667-2680.
  10. Barton H. Hamilton, 2000. "Does Entrepreneurship Pay? An Empirical Analysis of the Returns to Self-Employment," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 604-631, June.
  11. Carol Moore & Richard Mueller, 2002. "The transition from paid to self-employment in Canada: the importance of push factors," Applied Economics, Taylor & Francis Journals, vol. 34(6), pages 791-801.
  12. Evans, David S & Leighton, Linda S, 1989. "Some Empirical Aspects of Entrepreneurship," American Economic Review, American Economic Association, vol. 79(3), pages 519-35, June.
  13. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
  14. Blanchflower, D.G. & Oswald, A., 1991. "What Makes an Entrepreneur?," Economics Series Working Papers 99125, University of Oxford, Department of Economics.
  15. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2012. "Endogenous Entry, Product Variety, and Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 304 - 345.
  16. Rosen, Sherwin, 1981. "The Economics of Superstars," American Economic Review, American Economic Association, vol. 71(5), pages 845-58, December.
  17. Prabir C. Bhattacharya, 2002. "Rural-to-urban migration in LDCS: a test of two rival models," Journal of International Development, John Wiley & Sons, Ltd., vol. 14(7), pages 951-972.
  18. Earle, John S. & Sakova, Zuzana, 2000. "Business start-ups or disguised unemployment? Evidence on the character of self-employment from transition economies," Labour Economics, Elsevier, vol. 7(5), pages 575-601, September.
  19. Maloney, William, 2003. "Informality revisited," Policy Research Working Paper Series 2965, The World Bank.
  20. David G. Blanchflower, 2004. "Self-Employment: More may not be better," NBER Working Papers 10286, National Bureau of Economic Research, Inc.
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