EconPapers    
Economics at your fingertips  
 

Aggregate-Demand Amplification of Supply Disruptions: The Entry-Exit Multiplier

Florin Bilbiie and Marc Melitz

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

Abstract: 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—especially when wages are also rigid. This is in stark contrast to the benchmark New Keynesian model (NK), which predicts a positive output gap in response to that same shock under the same monetary policy. Endogenous entry-exit thus radically changes the consequences of nominal rigidities. In addition to the aggregate-demand amplification of supply disruptions, our model also reconciles the response of hours worked across the NK and RBC models. And unlike the standard NK model, our model can also be used to evaluate how monetary expansions can alleviate or even eliminate the negative output gap induced by supply disruptions.

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 (19)

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

Related works:
Working Paper: Aggregate-Demand Amplification of Supply Disruptions: The Entry-Exit Multiplier (2023) Downloads
Working Paper: Aggregate-Demand Amplification of Supply Disruptions: The Entry-Exit Multiplier (2023) Downloads
Working Paper: Aggregate-Demand Amplification of Supply Disruptions: The Entry-Exit Multiplier (2020) 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: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 (wpc@nber.org).

 
Page updated 2025-03-19
Handle: RePEc:nbr:nberwo:28258