Monetary Policy and Welfare with Heterogeneous Firms and Endogenous Entry

Dudley Cooke () and Tatiana Damjanovic ()

No 2021_02, Department of Economics Working Papers from Durham University, Department of Economics

Abstract: This paper studies the welfare consequences of monetary policy in a sticky wage New Keynesian model with heterogenous firms and endogenous entry. Cross-sectional dispersion in price-markups and labor shares is generated by a translog demand structure and aggregate fluctuations in these variables are driven by firm entry and selection. We show that when the distribution of firm-level productivity is Pareto, selection is such that the aggregate price-markup and labor share are fixed. If firm entry is static, the divine coincidence appears, and wage stability is optimal. If firm entry is dynamic, or selection is weakened, optimal stabilization policy accounts for the size distribution of firms. We calculate the welfare loss of ignoring firm entry and selection to be 0.1 − 0.3 percent of steady state consumption.

Keywords: Firm Entry; Heterogenous Firms; Optimal Monetary Policy; Translog Preferences (search for similar items in EconPapers)
JEL-codes: E32 E52 L11 (search for similar items in EconPapers)
Date: 2021-02
New Economics Papers: this item is included in nep-bec, nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.dur.ac.uk/resources/business/research/EconWP21_02.pdf main text (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:dur:durham:2021_02

Access Statistics for this paper

More papers in Department of Economics Working Papers from Durham University, Department of Economics Durham University Business School, Mill Hill Lane, Durham DH1 3LB, England. Contact information at EDIRC.
Bibliographic data for series maintained by Tatiana Damjanovic ().