Free entry and business cycles under the influence of animal spirits

Abstract

We provide a business cycle model in which endogenous markup fluctuations are the main driving force. These fluctuations occur due to some form of 'animal spirits', impelling firms in their entry-exit decisions within each sector. By contrast to existing models of the business cycle emphasizing the role of animal spirits, we do not rely on the sink property of the equilibrium to generate indeterminacy. Hence, while our model does pretty well in accounting for the main features of US business cycles, it avoids several criticisms addressed to these former models, concerning either their dependence upon strongly increasing returns and too high markups, or their implication of countercyclical movements of consumption. JEL classification number: D43, E32, L1

Market power and fiscal policy in OECD countries

“…New Keynesian synthesis models produce undesired endogenous mark-ups due to nominal rigidity, enhancing the effectiveness of demand-side policy, including fiscal policy -see Linnemann and Schabert (2003) for an example with productive public expenditure. Additionally, recent interest in macroeconomic models where desired mark-ups vary over time make the research topic even more attractive, as they work similarly to productivity shocks in the presence of active fiscal policy -see Barro and Tenreyro (2006), Bilbiie et al (2007), dos Santos Ferreira and Dufourt (2006), dos Santos Ferreira and Lloyd-Braga (2005), Jaimovich (2007), Jaimovich and Floetotto (2008), amongst others.…”

Market distortions and local indeterminacy: A general approach

“…where T h (σ) and D h (σ), h = 1, 2, are also functions of α ij , β ij , θ and s (see (11) and (12)). …”

Imperfect Competition and Indeterminacy of Aggregate Output

“…Under imperfect competition, this latter property of the model can be utilized to generate equilibrium indeterminacy in the marginal cost of production and composition of aggregate output. 14 The demand function for intermediate good i in period t is given by 1 3 The model can be easily extended to a continuum of technologies. The assumption that there are more than one aggregation technologies available to produce the same good is based on the intuition that the same set of inputs can be combined in di¤erent ways to yield the same kind of output.…”

“…Further, our model can generate humpshaped impulse responses under sunspots shocks whereas Jaimovich's model can not, making his model incapable of addressing the criticism raised by Schmitt-Grohe [25] against sunspots-driven business cycle models. Recently, Dos Santas Ferreira and Dufourt [14] also provide a business cycle model in which endogenous markup ‡uctuations are the main driving force. In their model, sunspots-driven ‡uctuations occur due to the indeterminacy of the number of …rms in a dynamic entry model with imperfect Cournotian competition and increasing returns to scale.…”