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Firm Entry, Inflation and the Monetary Transmission Mechanism

Vivien Lewis () and Céline Poilly ()

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: This paper estimates a business cycle model with endogenous ?rm entry by matching impulse responses to a monetary policy shock in US data. Our VAR includes net business formation, pro?ts and markups. We evaluate two channels through which entry may in?uence the monetary transmission process. Through the competition effect, the arrival of new entrants makes the demand for existing goods more elastic, and thus lowers desired markups and prices. Through the variety effect, increased ?rm and product entry raises consumption utility and thereby lowers the cost of living. This implies higher markups and, through the New Keynesian Phillips Curve, lower in?ation. While the proposed model does a good job at matching the observed dynamics, it generates insufficient volatility of markups and pro?ts. Estimates of standard parameters are largely unaffected by the introduction of ?rm entry. Our results lend support to the variety e¤ect; however, we ?nd no evidence for the competition effect.

Keywords: entry; in?ation; monetary transmission; monetary policy; extensive margin (search for similar items in EconPapers)
JEL-codes: E32 E52 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2011-01
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Related works:
Working Paper: Firm Entry, Inflation and the Monetary Transmission Mechanism (2011) Downloads
Working Paper: Firm entry, inflation and the monetary transmission mechanism (2011) Downloads
Working Paper: Firm Entry, Inflation and the Monetary Transmission Mechanism (2011) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:11/705

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