Optimal monetary policy with endogenous export participation
Review of Economic Dynamics
Elsevier for Society for Economic Dynamics
© 2015 Elsevier Inc. All rights reserved.
This paper studies optimal monetary policy in an open economy with firm heterogeneity and monopolistic competition. I consider a two-country dynamic general equilibrium model where firms make decisions to enter and exit the domestic and export markets. I show that endogenous export participation creates an incentive for policymakers to set high interest rates. This leads to high long-run inflation. Firm entry magnifies the welfare cost of inflation generating large gains to international monetary cooperation.
This is the author accepted manuscript. The final version is available from [Elsevier via the DOI in this record.
Vol. 21, pp. 72 - 88