Firms?entry, monetary policy and the international business cycle

Abstract

This paper studies the role of producer entry for global monetary policy and the propa- gation of the international business cycle in a two-country general equilibrium (DSGE) model with monopoly distortions and imperfect price adjustment. It introduces endogenous entry into the model of Benigno and Benigno (2008) so as to provide a ?rst step towards the joint deter- mination of exchange rates and product varieties under interest rate rules. The paper shows that endogenous product variety has relevant consequences for the dynamics of the exchange rate and the terms of trade, highlighting a novel channel of international cyclical transmission. The paper provides numerical examples of responses to country-speci?c shocks to aggregate productivity, entry costs and monetary policy under plausible interest rate settings with both ?oating and ?xed exchange rates and compare them to their ?exible price counterpart.product variety, ?rm entry, international business cycle, monetary policy, interest rate rules, exchange rate regimes