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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—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)
Date: 2020-12
New Economics Papers: this item is included in nep-dge and nep-mac
Note: EFG
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