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Towards a Theory of Firm Entry and Stabilization Policy

  • Bergin, Paul R
  • Corsetti, Giancarlo

This paper explores the role of stabilization policy in a model where firm entry responds to shocks and uncertainty. We evaluate stabilization policy in the context of a simple analytically solvable sticky price model, where firms have to prepay a fixed cost of entry. The presence of endogenous entry can alter the dynamic response to shocks, leading to greater persistence in the effects of monetary and real shocks. Entry affects welfare, depending on the love of variety in consumption and investment, as well as its implications for market competitiveness. In this context, monetary policy has an additional role in regulating the optimal number of entrants, as well as the optimal level of production at each firm. We find that the same monetary policy rule optimal for regulating the scale of production in familiar sticky price models without entry, also generates the amount of (endogenous) entry corresponding to a flex-price equilibrium.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5376.

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Date of creation: Nov 2005
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Handle: RePEc:cpr:ceprdp:5376
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  1. Giancarlo Corsetti & Philippe Martin & Paolo Pesenti, 2005. "Productivity Spillovers, Terms of Trade and the 'Home Market Effect'," Sciences Po publications 4964, Sciences Po.
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  14. Giancarlo Corsetti & Paolo Pesenti, 2005. "The simple geometry of transmission and stabilization in closed and open economies," Economics Working Papers ECO2005/26, European University Institute.
  15. Jeffrey Campbell, 1998. "Entry, Exit, Embodied Technology, and Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(2), pages 371-408, April.
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  18. Martin Eichenbaum & Charles L. Evans, 1995. "Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates," The Quarterly Journal of Economics, Oxford University Press, vol. 110(4), pages 975-1009.
  19. Kim, Jinill, 2004. "What determines aggregate returns to scale?," Journal of Economic Dynamics and Control, Elsevier, vol. 28(8), pages 1577-1594, June.
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  21. Florin Bilbiie & Fabio Ghironi & Marc J. Melitz, 2005. "Business Cycles and Firm Dynamics," 2005 Meeting Papers 842, Society for Economic Dynamics.
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