NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Optimal Monetary Policy with Endogenous Entry and Product Variety

Florin O. Bilbiie, Ippei Fujiwara, Fabio Ghironi

NBER Working Paper No. 17489
Issued in October 2011
NBER Program(s):   EFG   ME

We show that deviations from long-run stability of product prices are optimal in the presence of endogenous producer entry and product variety in a sticky-price model with monopolistic competition in which price stability would be optimal in the absence of entry. Specifically, a long-run positive (negative) rate of inflation is optimal when the benefit of variety to consumers falls short of (exceeds) the market incentives for creating that variety under flexible prices, governed by the desired markup. Plausible preference specifications and parameter values justify a long-run inflation rate of two percent or higher. Price indexation implies even larger deviations from long-run price stability. However, price stability (around this non-zero trend) is close to optimal in the short run, even in the presence of time-varying flexible-price markups that distort the allocation of resources across time and states. The central bank uses its leverage over real activity in the long run, but not in the short run. Our results point to the need for continued empirical research on the determinants of markups and investigation of the benefit of product variety to consumers.

download in pdf format
   (1223 K)

email paper

This paper is available as PDF (1223 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w17489

"Optimal Monetary Policy with Endogenous Entry and Product Variety" with Florin O. Bilbiie, Ippei Fujiwara, Journal of Monetary Economics, forthcoming. citation courtesy of

Users who downloaded this paper also downloaded these:
Bilbiie, Ghironi, and Melitz w13199 Monetary Policy and Business Cycles with Endogenous Entry and Product Variety
Angeletos and La'O w17525 Optimal Monetary Policy with Informational Frictions
Chugh and Ghironi w17319 Optimal Fiscal Policy with Endogenous Product Variety
Bilbiie, Ghironi, and Melitz Monetary Policy and Business Cycles with Endogenous Entry and Product Variety
Bilbiie, Ghironi, and Melitz w14383 Monopoly Power and Endogenous Product Variety: Distortions and Remedies
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us