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Firms entry, monetary policy and the international business cycle

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  • Cavallari Lilia

Abstract

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.

Suggested Citation

  • Cavallari Lilia, 2011. "Firms entry, monetary policy and the international business cycle," wp.comunite 0086, Department of Communication, University of Teramo.
  • Handle: RePEc:ter:wpaper:0086
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    More about this item

    Keywords

    product variety; firm entry; international business cycle; monetary policy; interest rate rules; exchange rate regimes;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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