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Firms entry, monetary policy and the international business cycle

  • Cavallari Lilia

This paper provides a novel theory of the international business cycle grounded on firms entry and sticky prices. It shows that under simple monetary rules pro-cyclical entry can generate fluctuations in consumption, output and investment as large as those observed in the data while at the same time providing positive international comovements and highly volatile terms of trade. The capacity to capture these stylized facts of the international business cycle overcomes the well-known difficulties of the standard open economy real business cycle model in this regard. Numerical simulations show that floating regimes exacerbate counter-cyclical markup movements. Fixed regimes, on the other hand, lead to an increase in the volatility of?firm entry.

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Paper provided by Department of Communication, University of Teramo in its series wp.comunite with number 0086.

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Date of creation: Nov 2011
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Handle: RePEc:ter:wpaper:0086
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