Firm Entry, Competitive Pressures and the US Inflation Dynamics

47 Pages Posted: 23 Mar 2011

Date Written: September 15, 2010

Abstract

This paper studies the effect of competitive pressures on inflation dynamics. To this end it derives and estimates a New Keynesian Phillips curve in a model with endogenous firm entry. The number of active firms is inversely related to their market power. By taking into account the number of competitors, the pass-through of real marginal cost on inflation is separately identifiable from the effect of endogenous desired markup fluctuations. Estimates with US data suggest that the effect of real marginal cost on inflation is stronger than that found in the empirical test of the standard model. The estimated elasticity of the desired markup with respect to the number of firms implies that an increase of 10% in the number of active firms would lower annual inflation by 1.4% in the short run.

Keywords: inflation dynamics, markups, firm entry

JEL Classification: E31

Suggested Citation

Cecioni, Martina, Firm Entry, Competitive Pressures and the US Inflation Dynamics (September 15, 2010). Bank of Italy Temi di Discussione (Working Paper) No. 773, Available at SSRN: https://ssrn.com/abstract=1788104 or http://dx.doi.org/10.2139/ssrn.1788104

Martina Cecioni (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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