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New monetarism with endogenous product variety and monopolistic competition

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  • Silva, Mario

Abstract

I examine the role played by endogenous variety and monopolistic competition in the long-run transmission of monetary policy. I integrate free entry, product variety and monopolistic competition into a New Monetarist framework, considering preferences that give rise to either constant or variable markups. I find that inflation generally reduces variety. Under CES preferences, firms are inefficiently small, with the inefficiency increasing with product differentiation and the extent of search frictions. The Friedman rule is the best policy under CES preferences. In contrast, with variable elasticity of demand, inflation can increase firm size, reduce markups, and raise welfare, even though output is lower. Under CES preferences, the welfare cost of inflation is high; moreover, this cost increases monotonically with the markup and is higher with endogenous variety than with a fixed product space.

Suggested Citation

  • Silva, Mario, 2017. "New monetarism with endogenous product variety and monopolistic competition," Journal of Economic Dynamics and Control, Elsevier, vol. 75(C), pages 158-181.
    • Handle: RePEc:eee:dyncon:v:75:y:2017:i:c:p:158-181
    DOI: 10.1016/j.jedc.2016.12.006
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    2. Zachary Bethune & Guillaume Rocheteau & Tsz-Nga Wong & Cathy Zhang, 2022. "Lending Relationships and Optimal Monetary Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(4), pages 1833-1872.
    3. Tai-Wei Hu & Guillaume Rocheteau & Lucie Lebeau & Younghwan In, 2018. "Gradual Bargaining in Decentralized Asset Markets," 2018 Meeting Papers 606, Society for Economic Dynamics.

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    More about this item

    Keywords

    Money; Search and matching; Monopolistic competition; Taste for variety; Free entry; Welfare cost of inflation;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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