Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/97745
Authors: 
Lewis, Vivien
Year of Publication: 
2012
Series/Report no.: 
IMFS Working Paper Series 50
Abstract: 
This paper characterises optimal monetary policy in an economy with endogenous …firm entry, a cash-in-advance constraint and preset wages. Firms must make pro…fits to cover entry costs; thus the markup on goods prices is efficient. However, because leisure is not priced at a markup, the consumption-leisure tradeoff is distorted. Consequently, the real wage, hours and production are suboptimally low. Due to the labour requirement in entry, insufficient labour supply also implies that entry is too low. The paper shows that in the absence of …fiscal instruments such as labour income subsidies, the optimal monetary policy under sticky wages achieves higher welfare than under flexible wages. The policy maker uses the money supply instrument to raise the real wage - the cost of leisure - above its flexible-wage level, in response to expansionary shocks to productivity and entry costs. This raises labour supply, expanding production and …rm entry.
Subjects: 
entry
optimal monetary policy
sticky wages
JEL: 
E52
E63
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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