Optimal monetary policy with endogenous entry and product variety

Florin O. Bilbiie, Ippei Fujiwara, Fabio Ghironi

Research output: Contribution to journalArticle

21 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)1-20
Number of pages20
JournalJournal of Monetary Economics
Volume64
DOIs
Publication statusPublished - 2014 May

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Keywords

  • Entry
  • Optimal inflation rate
  • Price stability
  • Product variety
  • Ramsey-optimal monetary policy

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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