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Learning By Doing in New Firms and the Optimal Rate of Inflation

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  • Weber, Henning

Abstract

Empirical data suggest that new fi rms tend to grow faster than incumbent firms in terms of their productivity. A sticky-price model with learning-by-doing in new firms fi ts this data and predicts that for plausible calibrations, the optimal long-run inflation rate is positive and between 0.5% and 1.5% per year. A positive long-run inflation rate helps the fast-growing new fi rms to align their real price with their idiosyncratic productivity growth. In contrast, the standard sticky-price model without learning-by-doing in new fi rms predicts an optimal long-run inflation rate near zero. In a two-sector model with learning-by-doing in new firms, the policy tradeo that arises between new and incumbent firms is considerably more severe than the policy tradeo that arises between economic sectors. --

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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79761.

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Date of creation: 2013
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Handle: RePEc:zbw:vfsc13:79761

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