TY - JOUR
T1 - Optimal monetary policy with endogenous entry and product variety
AU - Bilbiie, Florin O.
AU - Fujiwara, Ippei
AU - Ghironi, Fabio
N1 - Funding Information:
Bilbiie thanks Banque de France for financial support through the Chaire Banque de France at the Paris School of Economics and Ghironi thanks the NSF for financial support through a grant to the NBER. Work on this paper was done while Fujiwara was Director and Senior Economist at the Bank of Japan, and Ghironi was a Visiting Scholar at the Federal Reserve Bank of Boston. The support of these institutions is also acknowledged with gratitude. The views expressed in this paper are those of the authors and do not necessarily reflect official views or policies of the Bank of Japan, Banque de France, the Federal Reserve Bank of Boston, the Federal Reserve System, the CEPR, or the NBER.
PY - 2014/5
Y1 - 2014/5
N2 - Deviations from long-run price stability are optimal in the presence of endogenous entry and product variety in a sticky-price model in which price stability would be optimal otherwise Long-run inflation (deflation) is optimal when the benefit of variety to consumers falls short of (exceeds) the market incentive for creating that variety-the desired markup; Price indexation exacerbates this mechanism. Plausible preference specifications and parameter values justify positive long-run inflation rates. However, short-run price stability (around this non-zero trend) is close to optimal, even in the presence of endogenously time-varying desired markups that distort the intertemporal allocation of resources.
AB - Deviations from long-run price stability are optimal in the presence of endogenous entry and product variety in a sticky-price model in which price stability would be optimal otherwise Long-run inflation (deflation) is optimal when the benefit of variety to consumers falls short of (exceeds) the market incentive for creating that variety-the desired markup; Price indexation exacerbates this mechanism. Plausible preference specifications and parameter values justify positive long-run inflation rates. However, short-run price stability (around this non-zero trend) is close to optimal, even in the presence of endogenously time-varying desired markups that distort the intertemporal allocation of resources.
KW - Entry
KW - Optimal inflation rate
KW - Price stability
KW - Product variety
KW - Ramsey-optimal monetary policy
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U2 - 10.1016/j.jmoneco.2014.02.006
DO - 10.1016/j.jmoneco.2014.02.006
M3 - Article
AN - SCOPUS:84899059904
SN - 0304-3932
VL - 64
SP - 1
EP - 20
JO - Journal of Monetary Economics
JF - Journal of Monetary Economics
ER -