IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Firm Entry, Inflation and the Monetary Transmission Mechanism

Listed author(s):
  • Céline Poilly

    (Université catholique de Louvain)

  • Vivien Lewis

    (Ghent University)

This paper estimates a business cycle model with endogenous firm entry by matching impulse responses to a monetary policy shock in US data. Our VAR includes net business formation, profits and markups. We evaluate two channels through which entry may influence the monetary transmission process. Through the competition effect, the arrival of new entrants makes the demand for existing goods more elastic, and thus lowers desired markups and prices. Through the variety effect, increased firm and product entry raises consumption utility and thereby lowers the cost of living. This implies higher markups and, through the New Keynesian Phillips Curve, lower inflation. While the proposed model does a good job at matching the observed dynamics, it generates insufficient volatility of markups and profits. Estimates of standard parameters are largely unaffected by the introduction of firm entry. Our results lend support to the variety effect; however, we find no evidence for the competition effect.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: https://economicdynamics.org/meetpapers/2011/paper_113.pdf
Download Restriction: no

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 113.

as
in new window

Length:
Date of creation: 2011
Handle: RePEc:red:sed011:113
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Ravn, Morten O & Schmitt-Grohé, Stephanie & Uribe, Martín & Uusküla, Lenno, 2009. "Deep Habits and the Dynamic Effects of Monetary Policy Shocks," CEPR Discussion Papers 7128, C.E.P.R. Discussion Papers.
  2. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc.
  3. colciago, andrea & Rossi, Lorenza, 2011. "Endogenous Market Structures and the Business Cycle," MPRA Paper 29629, University Library of Munich, Germany.
  4. Céline Poilly, 2007. "Does Money Matter for the Identification of Monetary Policy Shocks: A DSGE Perspective," THEMA Working Papers 2007-23, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  5. Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1999. "Optimal monetary policy with staggered wage and price contracts," International Finance Discussion Papers 640, Board of Governors of the Federal Reserve System (U.S.).
  6. David Weinstein & Christian Broda, 2004. "Globalization and the Gains from Variety," 2004 Meeting Papers 530, Society for Economic Dynamics.
  7. Julio Carrillo & Patrick Fève & Julien Matheron, 2007. "Monetary Policy Inertia or Persistent Shocks: A DSGE Analysis," International Journal of Central Banking, International Journal of Central Banking, vol. 3(2), pages 1-38, June.
  8. Nir Jaimovich, 2004. "Firm Dynamics, Markup Variations, and the Business Cycle," Discussion Papers 07-013, Stanford Institute for Economic Policy Research, revised Mar 2007.
  9. Morten O. Ravn & Stephanie Schmitt-Grohe, 2004. "Deep Habits," 2004 Meeting Papers 208, Society for Economic Dynamics.
  10. Christopoulou, Rebekka & Vermeulen, Philip, 2008. "Markups in the euro area and the US over the period 1981-2004: a comparison of 50 sectors," Working Paper Series 0856, European Central Bank.
  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. Ireland, Peter N., 2001. "Sticky-price models of the business cycle: Specification and stability," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 3-18, February.
  13. V. Lewis, 2008. "Business Cycle Evidence on Firm Entry," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 08/539, Ghent University, Faculty of Economics and Business Administration.
  14. Steffen Henzel & Oliver Hülsewig & Eric Mayer & Timo Wollmershäuser, 2007. "The Price Puzzle Revisited: Can the Cost Channel Explain a Rise in Inflation after a Monetary Policy Shock?," CESifo Working Paper Series 2039, CESifo Group Munich.
  15. Jeffrey R. Campbell & Hugo A. Hopenhayn, 2005. "Market Size Matters," Journal of Industrial Economics, Wiley Blackwell, vol. 53(1), pages 1-25, 03.
  16. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  17. Benassy, Jean-Pascal, 1991. "Monopolistic competition," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 37, pages 1997-2045 Elsevier.
  18. Rabanal, Pau, 2007. "Does inflation increase after a monetary policy tightening? Answers based on an estimated DSGE model," Journal of Economic Dynamics and Control, Elsevier, vol. 31(3), pages 906-937, March.
  19. Rebekka Christopoulou & Philip Vermeulen, 2012. "Markups in the Euro area and the US over the period 1981–2004: a comparison of 50 sectors," Empirical Economics, Springer, vol. 42(1), pages 53-77, February.
  20. Lenno Uusküla, 2008. "Limited participation or sticky prices? New evidence from firm entry and failures," Bank of Estonia Working Papers 2008-07, Bank of Estonia, revised 02 Dec 2008.
  21. Lawrence J. Christiano & Mathias Trabandt & Karl Walentin, 2010. "DSGE models for monetary policy analysis," FRB Atlanta CQER Working Paper 2010-02, Federal Reserve Bank of Atlanta.
  22. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
  23. Benassy, Jean-Pascal, 1996. "Taste for variety and optimum production patterns in monopolistic competition," Economics Letters, Elsevier, vol. 52(1), pages 41-47, July.
  24. Paul Beaudry & Fabrice Collard & Franck Portier, 2006. "Gold Rush Fever in Business Cycles," NBER Working Papers 12710, National Bureau of Economic Research, Inc.
  25. Christian Broda & David E. Weinstein, 2010. "Product Creation and Destruction: Evidence and Price Implications," American Economic Review, American Economic Association, vol. 100(3), pages 691-723, June.
  26. Martina Cecioni, 2010. "Firm entry, competitive pressures and the US inflation dynamics," Temi di discussione (Economic working papers) 773, Bank of Italy, Economic Research and International Relations Area.
  27. Bergin, Paul R. & Corsetti, Giancarlo, 2008. "The extensive margin and monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1222-1237, October.
  28. 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.
  29. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
  30. Anderson, Gary & Moore, George, 1985. "A linear algebraic procedure for solving linear perfect foresight models," Economics Letters, Elsevier, vol. 17(3), pages 247-252.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:red:sed011:113. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.