EconPapers    
Economics at your fingertips  
 

OPTIMAL MONETARY POLICY AND FIRM ENTRY

Vivien Lewis ()

Macroeconomic Dynamics, 2013, vol. 17, issue 8, 1687-1710

Abstract: This paper characterizes optimal monetary policy in an economy with 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, because leisure is not priced at a markup, the consumption–leisure trade-off is distorted. Consequently, the real wage, hours, and production are suboptimally low. Because of the labor requirement for entry, insufficient labor supply also implies that entry is too low. This paper shows that in the absence of fiscal instruments such as labor income subsidies, the optimal monetary policy achieves higher welfare under sticky wages 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 to productivity and entry costs. This increases labor supply, expanding production and firm entry.

Date: 2013
References: Add references at CitEc
Citations: View citations in EconPapers (14) Track citations by RSS feed

Downloads: (external link)
https://www.cambridge.org/core/product/identifier/ ... type/journal_article link to article abstract page (text/html)

Related works:
Working Paper: Optimal monetary policy and firm entry (2012) Downloads
Working Paper: Optimal monetary policy and firm entry (2009) Downloads
Working Paper: Optimal Monetary Policy and Firm Entry (2009) Downloads
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:cup:macdyn:v:17:y:2013:i:08:p:1687-1710_00

Access Statistics for this article

More articles in Macroeconomic Dynamics from Cambridge University Press Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK.
Bibliographic data for series maintained by Keith Waters ().

 
Page updated 2021-12-20
Handle: RePEc:cup:macdyn:v:17:y:2013:i:08:p:1687-1710_00