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

Florin Bilbiie and Marc Melitz

No 28258, NBER Working Papers from National Bureau of Economic Research, Inc

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 output 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.

JEL-codes: E31 E32 E40 E60 (search for similar items in EconPapers)
Date: 2020-12
New Economics Papers: this item is included in nep-dge and nep-mac
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

Downloads: (external link)
http://www.nber.org/papers/w28258.pdf (application/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:nbr:nberwo:28258

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w28258

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().