Supply Shocks in a Heterogeneous-Firm New Keynesian Model: The Entry Multiplier

Florin O. Bilbiie and Marc J. Melitz

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: We study productivity shocks in a New Keynesian model with endogenous entry, selection, and nominal rigidities. Adjustment along the extensive margin fundamentally alters the transmission of TFP shocks. Under sticky prices, productivity disturbances generate a large "entry multiplier": firm entry-exit responds much more strongly than under flexible prices, even when output is allocatively efficient to first order. Introducing wage stickiness breaks this neutrality. Adverse TFP shocks reduce profits, trigger exit, and generate a negative output gap while remaining inflationary. Productivity shocks therefore behave as true supply shocks, without resorting to ad hoc cost-push or markup disturbances. Unlike standard markup shocks, TFP shocks in our framework imply procyclical profits and entry, consistent with the data. When wages are sufficiently sticky, expansionary monetary policy raises entry, closes the negative out-put gap, and improves welfare. The model remains analytically tractable and isomorphic to the standard New Keynesian framework, with entry and selection appearing as simple wedges.

Keywords: Entry; Aggregate Demand and Supply; Variety; Sticky Prices; Sticky Wages; Monetary Policy; Recessions (search for similar items in EconPapers)
JEL-codes: E30 E40 E50 E60 (search for similar items in EconPapers)
Date: 2026-06-30
New Economics Papers: this item is included in nep-dge
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.econ.cam.ac.uk/sites/default/files/pub ... pe-pdfs/cwpe2655.pdf

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:cam:camdae:2655

Access Statistics for this paper

More papers in Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge
Bibliographic data for series maintained by Jake Dyer ().