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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. 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.
  2. Ghironi, Fabio & Melitz, Marc J, 2004. "International Trade and Macroeconomic Dynamics with Heteroegenous Firms," CEPR Discussion Papers 4595, C.E.P.R. Discussion Papers.
  3. Bilbiie, Florin Ovidiu & Ghironi, Fabio & Melitz, Marc J, 2011. "Endogenous Entry, Product Variety, and Business Cycles," CEPR Discussion Papers 8564, C.E.P.R. Discussion Papers.
  4. Vivien Lewis & Céline Poilly, 2011. "Firm entry, inflation and the monetary transmission mechanism," Working Paper Research 211, National Bank of Belgium.
  5. Lewis, Vivien, 2009. "Business Cycle Evidence On Firm Entry," Macroeconomic Dynamics, Cambridge University Press, vol. 13(05), pages 605-624, November.
  6. Bils, Mark, 1987. "The Cyclical Behavior of Marginal Cost and Price," American Economic Review, American Economic Association, vol. 77(5), pages 838-55, December.
  7. Lilia Cavallari, 2010. "Firms?entry, monetary policy and the international business cycle," Working Papers 0210, CREI Università degli Studi Roma Tre, revised 2010.
  8. 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.
  9. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S71-102, October.
  10. 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.
  11. 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.
  12. Federico Etro & Andrea Colciago, 2010. "Endogenous Market Structures and the Business Cycle," Economic Journal, Royal Economic Society, vol. 120(549), pages 1201-1233, December.
  13. 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.
  14. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  15. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2007. "Monetary Policy and Business Cycles with Endogenous Entry and Product Variety," NBER Working Papers 13199, National Bureau of Economic Research, Inc.
  16. 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.
  17. 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.
  18. 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.
  19. 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.).
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