Optimal monetary policy with endogenous entry and product variety

Journal article: 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.

Author(s)

Florin Bilbiie, Ippei Fujiwara, Fabio Ghironi

Journal
  • Journal of Monetary Economics
Date of publication
  • 2014
Keywords
  • Entry
  • Optimal inflation rate
  • Price stability
  • Product variety
  • Ramsey-optimal monetary policy
Pages
  • see doi
Version
  • 1