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Modelling Entry Costs: Does It Matter For Business Cycle Transmission?

  • Lilia Cavallari

    (Università degli Studi di Roma Tre)

This paper studies the business cycle implications of entry costs in a dynamic stochastic general equilibrium model with firm entry and nominal rigidity. Simulations show that my baseline model matches the dynamics observed in the data fairly well. Remarkably, it overcomes the well-known di¢ culties of business cycle models in reproducing the persistence, smoothness and cyclicality of macroeconomic aggregates. I stress that capital entry costs are essential for these results.

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File URL: http://host.uniroma3.it/centri/crei/pubblicazioni/workingpapers2012/CREI_07_2012.pdf
File Function: First version, 2012
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Paper provided by CREI Università degli Studi Roma Tre in its series Working Papers with number 0712.

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Length: 22 pages
Date of creation: 2012
Date of revision: 2012
Handle: RePEc:rcr:wpaper:07_12
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  1. 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.
  2. Cavallari Lilia, 2007. "A Macroeconomic Model of Entry with Exporters and Multinationals," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-32, September.
  3. Fabio Ghironi & Marc J. Melitz, 2004. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," Boston College Working Papers in Economics 599, Boston College Department of Economics.
  4. Russ, Katheryn, 2004. "The Endogeneity of the Exchange Rate as a Determinant of FDI: A Model of Money, Entry, and Multinational Firms," Santa Cruz Department of Economics, Working Paper Series qt9xr4f238, Department of Economics, UC Santa Cruz.
  5. Lewis, Vivien, 2008. "Business cycle evidence on firm entry," Discussion Paper Series 1: Economic Studies 2008,08, Deutsche Bundesbank, Research Centre.
  6. Lilia Cavallari, 2010. "Firms?entry, monetary policy and the international business cycle," Working Papers 0210, CREI Università degli Studi Roma Tre, revised 2010.
  7. Bils, Mark, 1987. "The Cyclical Behavior of Marginal Cost and Price," American Economic Review, American Economic Association, vol. 77(5), pages 838-55, December.
  8. V. Lewis & C. Poilly, 2011. "Firm Entry, Inflation and the Monetary Transmission Mechanism," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 11/705, Ghent University, Faculty of Economics and Business Administration.
  9. Paul Romer, 1989. "Endogenous Technological Change," NBER Working Papers 3210, National Bureau of Economic Research, Inc.
  10. Olivier Blanchard & Francesco Giavazzi, 2001. "Macroeconomic Effects of Regulation and Deregulation in Goods and Labor Markets," NBER Working Papers 8120, National Bureau of Economic Research, Inc.
  11. Florin Bilbiie & F. Ghironi & M. Melitz, 2007. "Monetary Policy and Business Cycles With Endogenous Entry and Product Variety," Working Papers hal-00515664, HAL.
  12. Auray, Stéphane & Eyquem, Aurélien & Poutineau, Jean-Christophe, 2012. "The effect of a common currency on the volatility of the extensive margin of trade," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 1156-1179.
  13. 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.
  14. Stéphane Auray & Aurélien Eyquem, 2011. "Do Changes in Product Variety Matter for Business Cycles and Monetary Policy in Open Economies?," International Finance, Wiley Blackwell, vol. 14(3), pages 507-539, December.
  15. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  16. colciago, andrea & Rossi, Lorenza, 2011. "Endogenous Market Structures and the Business Cycle," MPRA Paper 29629, University Library of Munich, Germany.
  17. Max Floetotto & Nir Jaimovich & Seth Pruitt, 2009. "Markup variation and endogenous fluctuations in the price of investment goods," International Finance Discussion Papers 968, Board of Governors of the Federal Reserve System (U.S.).
  18. Julio J. Rotemberg & Michael Woodford, 1991. "Markups and the Business Cycle," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 63-140 National Bureau of Economic Research, Inc.
  19. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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