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Towards a theory of firm entry and stabilization policy

Paul Bergin and Giancarlo Corsetti ()

No ECO2005/24, Economics Working Papers from European University Institute

Abstract: This paper studies the role of stabilization policy in a model where firm entry responds to shocks and uncertainty. We evaluate stabilization policy in the context of a simple analytically solvable sticky price model, where firms have to prepay a fixed cost of entry. The presence of endogenous entry can alter the dynamic response to shocks, leading to greater persistence in the effects of monetary and real shocks. Entry affects welfare, depending on the love of variety in consumption and investment, as well as its implications for market competitiveness. In this context, monetary policy has an additional role in regulating the optimal number of entrants, as well as the optimal level of production at each firm. We find that the same monetary policy rule optimal for regulating the scale of production in familiar sticky price models without entry, also generates the amount of (endogenous) entry corresponding to a flex-price equilibrium.

Keywords: productivity; monetary policy; market dynamics (search for similar items in EconPapers)
JEL-codes: E22 E52 L16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2005
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Working Paper: Towards a Theory of Firm Entry and Stabilization Policy (2005) Downloads
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