Aggregate-Demand Amplification of Supply Disruptions: The Entry-Exit Multiplier
Florin Bilbiie and
No 28258, NBER Working Papers from National Bureau of Economic Research, Inc
Due to its impact on nominal firm profits, price rigidity amplifies the response of entry and exit to adverse supply shocks, such as COVID-19. This “entry-exit multiplier” triggers substantial magnification of the welfare losses due to negative supply shocks—even in an efficient-entry benchmark. In addition to those second-order effects, price rigidity also induces first-order amplification under external returns, when entry is no longer efficient. Endogenous entry-exit thus radically changes the consequences of nominal rigidities: in addition to the aggregate-demand amplification of supply disruptions, it also reconciles the response of hours worked across the benchmark New Keynesian and RBC models.
JEL-codes: E31 E32 E40 E60 (search for similar items in EconPapers)
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Working Paper: Aggregate-Demand Amplification of Supply Disruptions: The Entry-Exit Multiplier (2020)
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