Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/144423
Authors: 
Lewis, Vivien
Poilly, Céline
Year of Publication: 
2011
Series/Report no.: 
Working Paper Research 211
Abstract: 
This paper estimates a business cycle model with endogenous firm entry by matching impulse responses to a monetary policy shock in US data. Our VAR includes net business formation, profits and markups. We evaluate two channels through which entry may influence 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 firm 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 inflation. While the proposed model does a good job at matching the observed dynamics, it generates insufficient volatility of markups and profits. Estimates of standard parameters are largely unaffected by the introduction of firm entry. Our results lend support to the variety effect; however, we find no evidence for the competition effect.
Subjects: 
entry
inflation
monetary transmission
monetary policy
extensive margin
JEL: 
E32
E52
Document Type: 
Working Paper

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