Optimal Monetary Policy and Firm Entry

Vivien Lewis ()

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: This paper characterises optimal short-run monetary policy in an economy with monopolistic competition, endogenous firm entry, a cash-in-advance constraint and preset wages. Firms must make profits to cover entry costs; thus the markup on goods prices is efficient. However, a distortion results from the absence of a markup on leisure. This distortion affects the investment margin due to the labour requirement in entry. In the absence of fiscal instruments such as labour income subsidies, the optimal monetary policy under sticky wages achieves higher welfare than under flexible wages. The policy maker uses the money supply instrument to raise the real wage - the cost of leisure - above its flexible-wage level, in response to expansionary shocks. This induces a rise in labour hours and more production of goods and new firms.

Keywords: entry; optimal policy (search for similar items in EconPapers)
JEL-codes: E52 E63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2009-08
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Working Paper: Optimal monetary policy and firm entry (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:rug:rugwps:09/604

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