We use a two-country, stochastic, general equilibrium model of international trade and macro- economic dynamics with monopolistic competition and heterogeneous rms to explore the role of entry in the domestic economy and the extensive margin of international trade in the dynamics of U.S. trade ows over the business cycle. We show that the model can reproduce the evidence on the cyclicality of U.S. trade and important features of the evidence on the extensive margins of domestic entry and international trade. Entry in the domestic economy and the implied di¤erences in the timing of export and import expansions in response to favorable productivity shocks provide the key mechanism for the models ability to explain this range of stylized facts.
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.
We build a dynamic model of rm-level adjustment to trade liberalization that jointly in- corporates the main salient features highlighted by recent empirical micro-level studies of rms and trade. Our model captures the joint entry, exit, export, and innovation decisions (subject to sunk costs) of heterogeneous rms as they adjust to trade liberalization. We characterize this industrial evolution over its entire transition path to a new steady state with lower trade costs - starting from the time that trade liberalization is rst announced (but not necessarily yet implemented). We rely on numerical methods to solve for these equilibrium paths. In order to more accurately capture the dynamics of rm adjustments to trade, we model the sunk nature of market entry costs for both the domestic and export market - as well as the per-unit and additional xed costs of exporting incurred in every period. Firm-level productivity evolves stochastically, and innovation involves a trade-o¤ between its cost and a return in terms of a betterdistribution of future productivity draws. Although the empirical micro-level studies of rms and export status initially emphasized the selection e¤ects of more productive rms into export markets, several recent studies have highlighted a separate channel for the e¤ects of trade on productivity operating through rm- level improvements in productivity. Our model captures both of these channels for the pro- ductivity enhancing e¤ects of trade - and analyzes their interactions over the adjustment path to lower trade costs. In particular, we highlight how the relative timing and magnitude of rm-level productivity improvements and export market entry decisions are also determined by non-technological factors such as the timing of trade liberalization announcements and the speed of liberalization. Under all these di¤erent trade liberalization scenarios (anticipated ver- sus surprise, gradual versus sudden), we characterize both the distributional e¤ects across rms as well as their aggregate e¤ects for industrial performance. We nd that the anticipation of upcoming liberalization, and a more gradual path of liberalization (once implemented) induces rms to innovate ahead of export market entry.