Florin Ovidiu Bilbiie

Endogenous Entry, Product Variety, and Business Cycles

This paper builds a framework for the analysis of macroeconomic fluctuations that incorporates the endogenous determination of the number of producers and products over the business cycle. Economic expansions induce higher entry rates by prospective entrants subject to sunk investment costs. The sluggish response of the number of producers generates a new and potentially important endogenous propagation mechanism for business cycle models. The return to investment determines household saving decisions, producer entry, and the allocation of labor across sectors. Our framework replicates several features of business cycles and predicts procyclical profits even for preference specifications that imply countercyclical markups.

Asset-Market Participation, Monetary Policy Rules, and the Great Inflation

This paper argues that limited asset market participation is crucial in explaining U.S. macroeconomic performance and monetary policy before the 1980s and their changes thereafter. In an otherwise conventional sticky-price model, standard aggregate demand logic is inverted at low enough asset market participation: interest rate increases become expansionary, and passive monetary policy ensures equilibrium determinacy and maximizes welfare. This suggests that Federal Reserve policy in the pre-Volcker era was better than conventional wisdom implies. We provide empirical evidence consistent with this hypothesis and study the relative merits of changes in structure and shocks for reproducing the conquest of the Great Inflation and the Great Moderation.

Monetary Policy and Business Cycles with Endogenous Entry and Product Variety [with Comments and Discussion]

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.

The Time Inconsistency of Delegation-Based Time Inconsistency Solutions in Monetary Policy

A prominent solution to the time-inconsistency problem inherent to monetary policymaking consists of delegating monetary policy to an independent central bank by an appropriately designed inflation contract or target. This paper shows that delegation is not a solution to this problem: optimal delegation requires commitment and is not time-consistent, while time-consistent delegation is suboptimal. We prove these results formally in a popular dynamic model of monetary policy. Introducing costs of reappointing the central banker can only solve this problem if the government is infinitely averse to changing central bank’s contract.