The extensive margin and monetary policy |
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Authors: | Paul R Bergin Giancarlo Corsetti |
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Institution: | a Department of Economics, University of California at Davis, One Shields Avenue Davis, CA 95616, USA and NBER b Robert Schuman Centre for Advance Studies, European University Institute, Via dei Roccettini 9, I-50016 San Domenico di Fiesole, Italy and University of Rome III, and CEPR |
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Abstract: | The creation of new firms, referred to as the extensive margin, is a significant but overlooked dimension of monetary policy. A monetary VAR documents that monetary policy has significant effects on firm creation. An analytically tractable model combining sticky prices and firm entry shows that entry alters the transmission of monetary policy innovations, acting much like a type of investment in more standard models. Monetary policy rules that offset the uncertainty of productivity shocks can raise the mean level of entry and thereby welfare, suggesting a new motivation for stabilization policy. |
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Keywords: | E22 E52 L16 |
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