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Monetary Neutrality with Sticky Prices and Free Entry
Journal article

Monetary Neutrality with Sticky Prices and Free Entry

  • Bilbiie, Florin O. Department of Economics, University of Lausanne, Internef, Quartier Chamberonne, CH-1015, Lausanne, Switzerland and the Center for Economic and Policy Research (CEPR), , http://florin.bilbiie.googlepages.com
  • 2020-1-23
Published in:
  • The Review of Economics and Statistics. - MIT Press - Journals. - 2020, p. 1-42
Economics and Econometrics
Social Sciences (miscellaneous)
English Monetary policy is neutral even with fixed prices if free entry determines product variety optimally, as in Dixit and Stiglitz (1977). Entry substitutes for price flexibility in the welfare-based price index when individual prices are sticky. 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. Price stickiness thus generates deviations from monetary neutrality only in conjunction with entry frictions: when variety is not optimally determined (preferences are not Dixit-Stiglitz), or when entry is subject to sunk costs and lags. Wage stickiness, instead, implies non-neutrality even in the frictionless-entry benchmark.
Language
  • English
Open access status
closed
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Persistent URL
https://sonar.ch/global/documents/54679
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