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Monetary Policy and Welfare with Heterogeneous Firms and Endogenous Entry

Dudley Cooke and Tatiana Damjanovic ()

No 2021_02, Working Papers from Durham University Business School

Abstract: This paper studies the welfare consequences of monetary policy in a stickywage New Keynesian model with heterogenous firms and endogenous entry. Cross-sectional dispersion in price-markups and labor shares is generated by a translog demand structure and aggregate fluctuations in these variables are driven by firm entry and selection. We show that when the distribution of firm-level productivity is Pareto, selection is such that the aggregate price-markup and labor share are fixed. If firm entry is static, the divine coincidence appears, and wage stability is optimal. If firm entry is dynamic, or selection is weakened, optimal stabilization policy accounts for the size distribution of firms. We calculate the welfare loss of ignoring firm entry and selection to be 0.1 − 0.3 percent of steady state consumption.

Keywords: Firm Entry; Heterogenous Firms; Optimal Monetary Policy; Translog Preferences (search for similar items in EconPapers)
JEL-codes: E32 E52 L11 (search for similar items in EconPapers)
Date: 2021-02
New Economics Papers: this item is included in nep-bec, nep-cba, nep-dge, nep-mac and nep-mon
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