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Optimal stabilization policy with endogenous firm entry

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  • Aleksander Berentsen
  • Christopher J. Waller

Abstract

Monetary policy has significant but overlooked effects on entry and exit of firms. We study optimal monetary stabilization policy in a DSGE model with microfounded money demand and endogenous firm entry. Due to a congestion externality affecting firm entry, the optimal policy deviates from the Friedman rule in all states even though all prices are fully flexible. In contrast to previous Ramsey model with flexible price, our calibration exercises suggest that the model can generate a high volatility of the nominal interest rate which is a direct consequence of policy actions to control entry.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2009-032.

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Date of creation: 2009
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Handle: RePEc:fip:fedlwp:2009-032

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Keywords: Monetary policy ; Econometric models;

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References

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  1. Aleksander Berentsen & Christopher J. Waller, 2009. "Price level targeting and stabilization policy," Working Papers 2009-033, Federal Reserve Bank of St. Louis.
  2. Guillaume Rocheteau & Randall Wright, 2005. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," Econometrica, Econometric Society, vol. 73(1), pages 175-202, 01.
  3. Lewis, Vivien, 2008. "Business cycle evidence on firm entry," Discussion Paper Series 1: Economic Studies 2008,08, Deutsche Bundesbank, Research Centre.
  4. Aleksander Berentsen & Guillaume Rocheteau & Shouyong Shi, 2004. "Friedman meets Hosios: efficiency in search models of money," Working Paper 0408, Federal Reserve Bank of Cleveland.
  5. Florin Bilbiie & Fabio Ghironi & Marc Melitz, 2012. "Endogenous Entry, Product Variety and Business Cycles," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00680634, HAL.
  6. Simeon Djankov & Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer, . "The Regulation of Entry," Working Paper 19462, Harvard University OpenScholar.
  7. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2003. "Optimal Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 825-860.
  8. Ricardo Lagos & Guillaume Rocheteau, 2004. "Inflation, output, and welfare," Working Paper 0407, Federal Reserve Bank of Cleveland.
  9. Aleksander Berentsen & Gabriele Camera & Christopher Waller, . "Money, Credit and Banking," IEW - Working Papers 219, Institute for Empirical Research in Economics - University of Zurich.
  10. Aleksander Berentsen & Gabriele Camera & C hristopher W aller, 2005. "The Distribution Of Money Balances And The Nonneutrality Of Money," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 465-487, 05.
  11. Guillaume Rocheteau & Christopher Waller, 2005. "Bargaining and the value of money," Working Paper 0501, Federal Reserve Bank of Cleveland.
  12. V. V. Chari & Patrick J. Kehoe, 1998. "Optimal fiscal and monetary policy," Staff Report 251, Federal Reserve Bank of Minneapolis.
  13. Satyajit Chatterjee & Russell W. Cooper, 1993. "Entry and exit, product variety and the business cycle," Working Papers 93-30, Federal Reserve Bank of Philadelphia.
  14. Devereux, Michael B. & Head, Allen C. & Lapham, Beverly J., 1996. "Aggregate fluctuations with increasing returns to specialization and scale," Journal of Economic Dynamics and Control, Elsevier, vol. 20(4), pages 627-656, April.
  15. Ricardo Lagos & Randall Wright, 2004. "A unified framework for monetary theory and policy analysis," Staff Report 346, Federal Reserve Bank of Minneapolis.
  16. Shouyong Shi, 1997. "A Divisible Search Model of Fiat Money," Econometrica, Econometric Society, vol. 65(1), pages 75-102, January.
  17. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
  18. Nir Jaimovich, 2004. "Firm Dynamics, Markup Variations, and the Business Cycle," Discussion Papers 07-013, Stanford Institute for Economic Policy Research, revised Mar 2007.
  19. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  20. Ireland, Peter N, 1996. "The Role of Countercyclical Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 704-23, August.
  21. Bilbiie, Florin O. & Ghironi, Fabio & Melitz, Marc J., 2012. "Endogenous Entry, Product Variety, and Business Cycles," Scholarly Articles 10914281, Harvard University Department of Economics.
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Citations

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Cited by:
  1. Lewis, Vivien, 2008. "Business cycle evidence on firm entry," Discussion Paper Series 1: Economic Studies 2008,08, Deutsche Bundesbank, Research Centre.
  2. Williamson, Stephen D. & Wright, Randall, 2010. "New Monetarist Economics: Methods," MPRA Paper 21486, University Library of Munich, Germany.
  3. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2007. "Monetary Policy and Business Cycles with Endogenous Entry and Product Variety," NBER Working Papers 13199, National Bureau of Economic Research, Inc.
  4. Berentsen, Aleksander & Waller, Christopher J., 2013. "Price-level targeting and stabilization policy," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 145-164.
  5. Paul Bergin & Ching-Yi Lin, 2010. "The Dynamic Effects of Currency Union on Trade," NBER Working Papers 16259, National Bureau of Economic Research, Inc.
  6. Allen Head & Junfeng Qiu, 2011. "Elastic Money, Inflation, and Interest Rate Policy," Working Papers 1152, Queen's University, Department of Economics.
  7. Vivien Lewis, 2009. "Optimal monetary policy and firm entry," Working Paper Research 178, National Bank of Belgium.

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