The authors build a dynamic model of the business cycle with monopolistically competitive firms. With simple assumptions concerning firm entry and exit, the model can explain some stylized facts of the business cycle that standard real business cycle models cannot predict. They include the cyclical behavior of the shares of capital and labor income in total income and the pattern of net firm creation. These predictions are robust to whether the main source of the business cycle is aggregate supply shocks or aggregate demand shocks.
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Find related papers by JEL classification: E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
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