Optimal monetary policy and firm entry

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
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.
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Metadaten
Author:Vivien Lewis
URN:urn:nbn:de:hebis:30:3-240815
URL:http://www.imfs-frankfurt.de/fileadmin/user_upload/WP_2012_50.pdf
Parent Title (German):Working paper series / Institute for Monetary and Financial Stability ; 50
Series (Serial Number):Working Paper Series : Institute for Monetary and Financial Stability (50)
Publisher:Johann Wolfgang Goethe-Univ., Inst. for Monetary and Financial Stability
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Year of Completion:2012
Year of first Publication:2012
Publishing Institution:Univ.-Bibliothek Frankfurt am Main
Release Date:2012/04/03
Tag:entry; optimal monetary policy; sticky wages
Issue:Version: 11 Oktober 2011
Pagenumber:34
HeBIS PPN:311400523
Institutes: Institute for Monetary and Financial Stability (IMFS)
Dewey Decimal Classification:330 Wirtschaft
JEL-Classification:E52 Monetary Policy
E63 Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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