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Business cycles with free entry ruled by animal spirits

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Author Info
Dos Santos Ferreira, Rodolphe
Lloyd-Braga, Teresa

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Abstract

We approach business cycles on the basis of extrinsic uncertainty, related to static indeterminacy of free entry oligopolistic equilibria. Firms, producing under increasing returns to scale, compete in prices in contestable markets. The number of active firms varies across sectoral equilibria, which depend upon (correct) producers' conjectures on competitors' actions. Coordination of these conjectures by some Markov chain generates endogenous shocks in markups and productivity. Consumers' expectations may in addition magnify this extrinsic uncertainty. As the source of fluctuations does not rely on dynamic indeterminacy, the required degree of increasing returns may be arbitrarily small, provided goods substitutability within each sector becomes arbitrarily large.

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Publisher Info
Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 32 (2008)
Issue (Month): 11 (November)
Pages: 3502-3519
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Handle: RePEc:eee:dyncon:v:32:y:2008:i:11:p:3502-3519

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Keywords: Business cycles Sunspots Free entry equilibrium Indeterminacy;

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  3. Grandmont, Jean-Michel, 1998. "Introduction to Market Psychology and Nonlinear Endogenous Business Cycles," Journal of Economic Theory, Elsevier, vol. 80(1), pages 1-13, May. [Downloadable!] (restricted)
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  7. Benhabib, Jess & Farmer, Roger E.A., 1999. "Indeterminacy and sunspots in macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 6, pages 387-448 Elsevier. [Downloadable!] (restricted)
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  14. Benhabib Jess & Rustichini Aldo, 1994. "Introduction to the Symposium on Growth, Fluctuations, and Sunspots: Confronting the Data," Journal of Economic Theory, Elsevier, vol. 63(1), pages 1-18, June. [Downloadable!] (restricted)
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  16. Farmer Roger E. A. & Guo Jang-Ting, 1994. "Real Business Cycles and the Animal Spirits Hypothesis," Journal of Economic Theory, Elsevier, vol. 63(1), pages 42-72, June. [Downloadable!] (restricted)
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  17. Satyajit Chatterjee & Russell Cooper, 1993. "Entry and Exit, Product Variety and the Business Cycle," NBER Working Papers 4562, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  18. King, Robert G. & Rebelo, Sergio T., 1999. "Resuscitating real business cycles," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 14, pages 927-1007 Elsevier. [Downloadable!] (restricted)
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  19. Benhabib, Jess, 1998. "Introduction to Sunspots in Macroeconomics," Journal of Economic Theory, Elsevier, vol. 81(1), pages 1-6, July. [Downloadable!] (restricted)
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