TY - JOUR
T1 - New monetarism with endogenous product variety and monopolistic competition
AU - Silva, Mario
N1 - Publisher copyright:
© 2017 Elsevier B.V. All rights reserved.
PY - 2017/2
Y1 - 2017/2
N2 - I examine the role played by endogenous variety and monopolistic competition in the long-run transmission of monetary policy. I integrate free entry, product variety and monopolistic competition into a New Monetarist framework, considering preferences that give rise to either constant or variable markups. I find that inflation generally reduces variety. Under CES preferences, firms are inefficiently small, with the inefficiency increasing with product differentiation and the extent of search frictions. The Friedman rule is the best policy under CES preferences. In contrast, with variable elasticity of demand, inflation can increase firm size, reduce markups, and raise welfare, even though output is lower. Under CES preferences, the welfare cost of inflation is high; moreover, this cost increases monotonically with the markup and is higher with endogenous variety than with a fixed product space.
AB - I examine the role played by endogenous variety and monopolistic competition in the long-run transmission of monetary policy. I integrate free entry, product variety and monopolistic competition into a New Monetarist framework, considering preferences that give rise to either constant or variable markups. I find that inflation generally reduces variety. Under CES preferences, firms are inefficiently small, with the inefficiency increasing with product differentiation and the extent of search frictions. The Friedman rule is the best policy under CES preferences. In contrast, with variable elasticity of demand, inflation can increase firm size, reduce markups, and raise welfare, even though output is lower. Under CES preferences, the welfare cost of inflation is high; moreover, this cost increases monotonically with the markup and is higher with endogenous variety than with a fixed product space.
KW - Money
KW - Search and matching
KW - Monopolistic competition
KW - Taste for variety
KW - Free entry
KW - Welfare cost of inflation
UR - https://www.scopus.com/inward/record.uri?eid=2-s2.0-85008939400&doi=10.1016%2fj.jedc.2016.12.006&partnerID=40&md5=a78ae7386626de029f5d4e99967c8d28
U2 - 10.1016/j.jedc.2016.12.006
DO - 10.1016/j.jedc.2016.12.006
M3 - Journal article
SN - 0165-1889
VL - 75
SP - 158
EP - 181
JO - Journal of Economic Dynamics and Control
JF - Journal of Economic Dynamics and Control
ER -