Towards a Theory of Firm Entry and Stabilization Policy / Paul R. Bergin, Giancarlo Corsetti.

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Bergin, Paul R

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w11821.Publication details: Cambridge, Mass. National Bureau of Economic Research 2005.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: This paper studies the role of stabilization policy in a model where firm entry responds to shocks and uncertainty. We evaluate stabilization policy in the context of a simple analytically solvable sticky price model, where firms have to prepay a fixed cost of entry. The presence of endogenous entry can alter the dynamic response to shocks, leading to greater persistence in the effects of monetary and real shocks. Entry affects welfare, depending on the love of variety in consumption and investment, as well as its implications for market competitiveness. In this context, monetary policy has an additional role in regulating the optimal number of entrants, as well as the optimal level of production at each firm. We find that the same monetary policy rule optimal for regulating the scale of production in familiar sticky price models without entry, also generates the amount of (endogenous) entry corresponding to a flex-price equilibrium.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w11821 (Browse shelf(Opens below))	Not For Loan

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December 2005.

This paper studies the role of stabilization policy in a model where firm entry responds to shocks and uncertainty. We evaluate stabilization policy in the context of a simple analytically solvable sticky price model, where firms have to prepay a fixed cost of entry. The presence of endogenous entry can alter the dynamic response to shocks, leading to greater persistence in the effects of monetary and real shocks. Entry affects welfare, depending on the love of variety in consumption and investment, as well as its implications for market competitiveness. In this context, monetary policy has an additional role in regulating the optimal number of entrants, as well as the optimal level of production at each firm. We find that the same monetary policy rule optimal for regulating the scale of production in familiar sticky price models without entry, also generates the amount of (endogenous) entry corresponding to a flex-price equilibrium.