Optimal monetary policy with endogenous entry and product variety

Florin O Bilbiie, Ippei Fujiwara, Fabio Ghironi

    Research output: Contribution to journalArticle


    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.
    Original languageEnglish
    Pages (from-to)1-20
    JournalJournal of Monetary Economics
    Publication statusPublished - 2014


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