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Optimal monetary policy with endogenous entry and product variety

Author

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  • Florin Bilbiie

    (CEPR - Center for Economic Policy Research - CEPR, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Ippei Fujiwara
  • Fabio Ghironi

    (Department of Economics - BC - Boston College)

Abstract

Deviations from long-run price stability are optimal in the presence of endogenous entry and product variety in a sticky-price model in which price stability would be optimal otherwise Long-run inflation (deflation) is optimal when the benefit of variety to consumers falls short of (exceeds) the market incentive for creating that variety--the desired markup; Price indexation exacerbates this mechanism. Plausible preference specifications and parameter values justify positive long-run inflation rates. However, short-run price stability (around this non-zero trend) is close to optimal, even in the presence of endogenously time-varying desired markups that distort the intertemporal allocation of resources.

Suggested Citation

  • Florin Bilbiie & Ippei Fujiwara & Fabio Ghironi, 2014. "Optimal monetary policy with endogenous entry and product variety," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00975152, HAL.
  • Handle: RePEc:hal:cesptp:halshs-00975152
    DOI: 10.1016/j.jmoneco.2014.02.006
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    More about this item

    Keywords

    Entry; Optimal inflation rate; Price stability; Product variety; Ramsey-optimal monetary policy;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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