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Optimal monetary policy with endogenous entry and product variety

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.
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Submitted on : Tuesday, April 8, 2014 - 9:30:18 AM
Last modification on : Friday, April 29, 2022 - 10:13:03 AM

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Florin Bilbiie, Ippei Fujiwara, Fabio Ghironi. Optimal monetary policy with endogenous entry and product variety. Journal of Monetary Economics, Elsevier, 2014, pp.see doi. ⟨10.1016/j.jmoneco.2014.02.006⟩. ⟨halshs-00975152⟩



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