TY - JOUR AU - Bilbiie, Florin O AU - Ghironi, Fabio AU - Melitz, Marc J TI - Monetary Policy and Business Cycles with Endogenous Entry and Product Variety JF - National Bureau of Economic Research Working Paper Series VL - No. 13199 PY - 2007 Y2 - June 2007 DO - 10.3386/w13199 UR - http://www.nber.org/papers/w13199 L1 - http://www.nber.org/papers/w13199.pdf N1 - Author contact info: Florin O. Bilbiie University of Lausanne E-Mail: florin.bilbiie@gmail.com Fabio Ghironi Department of Economics University of Washington Savery Hall, Box 353330 Seattle, WA 98195 Tel: 206/543-5795 Fax: 206/685-7477 E-Mail: fabio.ghironi.1@gmail.com Marc Melitz Department of Economics Harvard University 215 Littauer Center Cambridge, MA 02138 E-Mail: mmelitz@harvard.edu M1 - published as Florin O. Bilbiie, Fabio Ghironi, Marc J. Melitz. "Monetary Policy and Business Cycles with Endogenous Entry and Product Variety," in Daron Acemoglu, Kenneth Rogoff and Michael Woodford, editors, "NBER Macroeconomics Annual 2007, Volume 22" University of Chicago Press (2008) M3 - presented at "22nd Annual Conference on Macroeconomics", March 30-31, 2007 AB - This paper studies the role of endogenous producer entry and product creation for monetary policy analysis and business cycle dynamics in a general equilibrium model with imperfect price adjustment. Optimal monetary policy stabilizes product prices, but lets the consumer price index vary to accommodate changes in the number of available products. The free entry condition links the price of equity (the value of products) with marginal cost and markups, and hence with inflation dynamics. No-arbitrage between bonds and equity links the expected return on shares, and thus the financing of product creation, with the return on bonds, affected by monetary policy via interest rate setting. This new channel of monetary policy transmission through asset prices restores the Taylor Principle in the presence of capital accumulation (in the form of new production lines) and forward-looking interest rate setting, unlike in models with traditional physical capital. We also study the implications of endogenous variety for the New Keynesian Phillips curve and business cycle dynamics more generally, and we document the effects of technology, deregulation, and monetary policy shocks, as well as the second moment properties of our model, by means of numerical examples. ER -