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Firm entry, competitive pressures and the US inflation dynamics

  • Martina Cecioni


    (Bank of Italy)

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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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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  1. 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.
  2. Rotemberg, Julio J. & Woodford, Michael, 1999. "The cyclical behavior of prices and costs," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 16, pages 1051-1135 Elsevier.
  3. Altig, David E & Christiano, Lawrence J. & Eichenbaum, Martin & Lindé, Jesper, 2005. "Firm-Specific Capital, Nominal Rigidities and the Business Cycle," CEPR Discussion Papers 4858, C.E.P.R. Discussion Papers.
  4. 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.
  5. Guerrieri, Luca & Gust, Christopher & López-Salido, J David, 2009. "International Competition and Inflation: A New Keynesian Perspective," CEPR Discussion Papers 7561, C.E.P.R. Discussion Papers.
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  7. Federico Etro & Andrea Colciago, 2010. "Endogenous Market Structures and the Business Cycle," Economic Journal, Royal Economic Society, vol. 120(549), pages 1201-1233, December.
  8. Jón Steinsson, 2000. "Optimal monetary policy in an economy with inflation persistence," Economics wp11, Department of Economics, Central bank of Iceland.
  9. 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.
  10. Imbs, Jean & Jondeau, Eric & Pelgrin, Florian, 2007. "Aggregating Phillips Curves," CEPR Discussion Papers 6184, C.E.P.R. Discussion Papers.
  11. Peter N. Ireland, 2000. "Sticky-Price Models of the Business Cycle: Specification and Stability," NBER Working Papers 7511, National Bureau of Economic Research, Inc.
  12. Jeffrey R. Campbell & Hugo A. Hopenhayn, 2003. "Market size matters," Working Paper Series WP-03-12, Federal Reserve Bank of Chicago.
  13. Lawrence J. Christiano & Martin Eichenbaum & Robert J. Vigfusson, 2003. "What happens after a technology shock?," International Finance Discussion Papers 768, Board of Governors of the Federal Reserve System (U.S.).
  14. Paul R. Bergin & Giancarlo Corsetti, 2005. "Towards a Theory of Firm Entry and Stabilization Policy," NBER Working Papers 11821, National Bureau of Economic Research, Inc.
  15. 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.
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