Monetary policy is neutral even with fixed prices if free entry determines product variety optimally, as in Dixit and Stiglitz (1977). Entry substitutes for price flexibility in the welfare-based price index when individual prices are sticky. In response to aggregate demand expansions, the intensive (quantity produced of each good) and ex tensive (number of goods being produced) margins move in offsetting ways, leaving aggregate production unchanged. Price stickiness thus generates deviations from monetary neutrality only in conjunction with entry frictions: when variety is not optimally determined (preferences are not Dixit-Stiglitz) or when entry is subject to sunk costs and lags. Wage stickiness instead implies nonneutrality even in the frictionless-entry benchmark.

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Author notes

I am grateful to the editor, Olivier Coibion, and to three anonymous referees for constructive comments. This paper owes much debt to Jess Benhabib for lengthy, useful, and valuable discussions that helped clarify the contribution and bring it to its current shape, to Marc Melitz for general insights on models with entry and variety since 2004, to Ippei Fujiwara and Fabio Ghironi for what I learned from our joint work on related topics, and to Virgiliu Midrigan, Edward Schlee, and Victor Rios-Rull for useful comments. I gratefully acknowledge without implicating the past support of Chaire Banque de France at PSE, of Institut Universitaire de France and thank NYU and CREi for hospitality during part of writing.

A supplemental appendix is available online at https://doi.org/10.1162/rest_a_00898.