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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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File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2010/2010-0773/en_tema_773.pdf
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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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Web page: http://www.bancaditalia.it

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  10. Paul Bergin & Giancarlo Corsetti, 2005. "Towards a theory of firm entry and stabilization policy," Economics Working Papers ECO2005/24, European University Institute.
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  12. Sbordone, Argia, 1998. "Prices and Unit Labor Costs: A New Test of Price Stickiness," Seminar Papers 653, Stockholm University, Institute for International Economic Studies.
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  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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