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Optimal stabilization policy with endogenous firm entry

  • Aleksander Berentsen
  • Christopher J. Waller

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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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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  1. V. V. Chari & Patrick J. Kehoe, 1998. "Optimal fiscal and monetary policy," Staff Report 251, Federal Reserve Bank of Minneapolis.
  2. Ricardo Lagos & Guillaume Rocheteau, 2004. "Inflation, output and welfare," Staff Report 342, Federal Reserve Bank of Minneapolis.
  3. Aleksander Berentsen & Guillaume Rocheteau & Shouyong Shi, 2004. "Friedman meets Hosios: efficiency in search models of money," Working Paper 0408, Federal Reserve Bank of Cleveland.
  4. Shouyong Shi, 1996. "A Divisible Search Model of Fiat Money," Working Papers 930, Queen's University, Department of Economics.
  5. Aleksander Berentsen & Gabriele Camera, 2004. "Money, Credit, and Banking," 2004 Meeting Papers 473, Society for Economic Dynamics.
  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, 2000. "Optimal monetary policy," Working Paper 00-10, Federal Reserve Bank of Richmond.
  8. Vivien Lewis, 2009. "Optimal monetary policy and firm entry," Working Paper Research 178, National Bank of Belgium.
  9. Satyajit Chatterjee & Russell Cooper, 1993. "Entry and Exit, Product Variety and the Business Cycle," NBER Working Papers 4562, National Bureau of Economic Research, Inc.
  10. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2012. "Endogenous Entry, Product Variety, and Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 304 - 345.
  11. 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.
  12. Nir Jaimovich, 2004. "Firm Dynamics, Markup Variations, and the Business Cycle," Discussion Papers 07-013, Stanford Institute for Economic Policy Research, revised Mar 2007.
  13. 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.
  14. Aleksander Berentsen & Christopher J. Waller, 2009. "Price level targeting and stabilization policy," Working Papers 2009-033, Federal Reserve Bank of St. Louis.
  15. Guillaume Rocheteau & Randall Wright, 2003. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," PIER Working Paper Archive 03-031, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  16. Boragan Aruoba, S. & Rocheteau, Guillaume & Waller, Christopher, 2007. "Bargaining and the value of money," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2636-2655, November.
  17. Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland.
  18. 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.
  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. Lewis, Vivien, 2008. "Business cycle evidence on firm entry," Discussion Paper Series 1: Economic Studies 2008,08, Deutsche Bundesbank, Research Centre.
  21. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
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