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Monetary Neutrality with Sticky Prices and Free Entry

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  • Bilbiie, Florin

Abstract

Monetary policy is neutral even with fixed prices, if there is free entry and variety is determined optimally as in Dixit and Stiglitz (1977). When individual prices are sticky, entry substitutes for price flexibility in the welfare-based price index. In response to aggregate demand expansions, the intensive (quantity produced of each good) and extensive (number of goods being produced) margins move in offsetting ways, leaving aggregate production unchanged. Deviations from neutrality thus occur only when variety is not optimally determined (preferences are not Dixit-Stiglitz) or when entry is subject to frictions.

Suggested Citation

  • Bilbiie, Florin, 2017. "Monetary Neutrality with Sticky Prices and Free Entry," CEPR Discussion Papers 12068, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12068
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    Cited by:

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    3. Khalil, Makram & Lewis, Vivien, 2024. "Product turnover and endogenous price flexibility in uncertain times," Discussion Papers 14/2024, Deutsche Bundesbank.
    4. Bilbiie, Florin & Trabandt, Mathias, 2023. "Sticky Prices or Sticky Wages? An Equivalence Result," CEPR Discussion Papers 18542, C.E.P.R. Discussion Papers.
    5. Andrea Colciago & Vivien Lewis & Branka Matyska, 2023. "Corporate taxes, productivity, and business dynamism," Working Papers 780, DNB.
    6. Hamano, Masashige & Zanetti, Francesco, 2022. "Monetary policy, firm heterogeneity, and product variety," European Economic Review, Elsevier, vol. 144(C).

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    More about this item

    Keywords

    Monetary policy; Neutrality; Sticky prices; Entry; Product variety; Monopolistic competition; Dixit-stiglitz; Sunk costs;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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