Firm Turnover and Inflation Dynamics
37 Pages Posted: 26 Aug 2016
Date Written: August 26, 2016
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.
Keywords: inflation, New-Keynesian Phillips curve, firm turnover
JEL Classification: E32, C11, E23
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