Optimal stabilization policy with endogenous firm entry

Aleksander Berentsen () and Christopher Waller ()

No 2009-032, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We study optimal monetary stabilization policy in a dynamic stochastic general equilibrium model where money is essential for trade and firm entry is endogenous. We do so when all prices are flexible and also when some are sticky. Due to an externality affecting firm entry, the central bank deviates from the Friedman rule. Calibration exercises suggest that the nominal interest rate should have been substantially smoother than the data if preference shocks were the main disturbance and much more volatile if productivity was the driving shock. This result is a direct consequence of policy actions to control entry.

Keywords: Monetary policy; Econometric models (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-pke
Date: 2009
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