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Firm turnover and inflation dynamics

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  • Lenno Uuskula

Abstract

This paper examines the role of firm turnover in explaining inflation dynamics. I augment a New-Keynesian DSGE model with endogenous entry and exogenous stochastic exit and estimate with the Bayesian full information approach for the US economy. Results show that shocks to the entry cost explain more than half of the inflation variance at the business cycle frequencies. When it is cheap to create firms, the number of new firms goes up and inflation increases as labour intensive creation of firms pushes up the demand for labour. Only gradually, when the number of firms is high and the number of new firms goes down again, does inflation fall, as stressed by the standard mechanism for an increasing number of firms

Suggested Citation

  • Lenno Uuskula, 2015. "Firm turnover and inflation dynamics," Bank of Estonia Working Papers wp2015-01, Bank of Estonia, revised 03 Feb 2015.
    • Handle: RePEc:eea:boewps:wp2015-01
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    References listed on IDEAS

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    More about this item

    Keywords

    inflation; New-Keynesian Phillips curve; firm turnover;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production

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