Working Paper: NBER ID: w11821
Authors: Paul R. Bergin; Giancarlo Corsetti
Abstract: This paper studies the role of stabilization policy in a model where firm entry responds to shocks and uncertainty. We evaluate stabilization policy in the context of a simple analytically solvable sticky price model, where firms have to prepay a fixed cost of entry. The presence of endogenous entry can alter the dynamic response to shocks, leading to greater persistence in the effects of monetary and real shocks. Entry affects welfare, depending on the love of variety in consumption and investment, as well as its implications for market competitiveness. In this context, monetary policy has an additional role in regulating the optimal number of entrants, as well as the optimal level of production at each firm. We find that the same monetary policy rule optimal for regulating the scale of production in familiar sticky price models without entry, also generates the amount of (endogenous) entry corresponding to a flex-price equilibrium.
Keywords: firm entry; stabilization policy; monetary policy; business cycles
JEL Codes: E22; E52; L16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary shocks (E39) | firm entry (M13) |
| fixed costs of entry (L11) | firm entry (M13) |
| decrease in real interest rates (E43) | expected profits from new firms (L26) |
| expected profits from new firms (L26) | firm entry (M13) |
| firm entry (M13) | output dynamics (C67) |
| monetary policy (E52) | production scale (D20) |
| increased entry (F29) | consumer welfare (D69) |