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Imperfect competition and indeterminacy of aggregate output

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  • Wang, Pengfei
  • Wen, Yi

Abstract

This paper shows imperfect competition can lead to indeterminacy in aggregate output in a standard DSGE model with imperfect competition. Indeterminacy arises in the model from the composition of aggregate output. In sharp contrast to the indeterminacy literature pioneered by Benhabib and Farmer [J. Benhabib, R. Farmer, Indeterminacy and increasing returns, J. Econ. Theory 63 (1) (1994) 19-41] and Gali [J. Gali, Monopolistic competition, business cycles, and the composition of aggregate demand, J. Econ. Theory 63 (1) (1994) 73-96], indeterminacy in our model is global; hence it is more robust to structural parameters. In addition, sunspots in our model can be autocorrelated. The paper provides a justification for exogenous variations in desired markups, which play an important role as a source of cost-push shocks in the monetary policy literature. Our model outperforms a standard RBC model driven by technology shocks in several dimensions, including the volatility of labor market and the hump-shaped output dynamics.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 143 (2008)
Issue (Month): 1 (November)
Pages: 519-540

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Handle: RePEc:eee:jetheo:v:143:y:2008:i:1:p:519-540

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Web page: http://www.elsevier.com/locate/inca/622869

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Keywords: Indeterminacy Global sunspots Self-fulfilling expectations Procyclical productivity Marginal costs Counter-cyclical markup Cost-push shocks Hump-shaped impulse responses;

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References

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Cited by:
  1. Zheng Liu & Pengfei Wang, 2014. "Credit Constraints and Self-Fulfilling Business Cycles," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(1), pages 32-69, January.
  2. Luís Aguiar-Conraria & Yi Wen, 2011. "OPEC’s oil exporting strategy and macroeconomic (in)stability," Working Papers, Federal Reserve Bank of St. Louis 2011-013, Federal Reserve Bank of St. Louis.
  3. Nirei, Makoto, 2013. "Interaction-based Foundation of Aggregate Investment Shocks," IIR Working Paper 13-04, Institute of Innovation Research, Hitotsubashi University.
  4. Wang, Vey & Lai, Chung-Hui, 2010. "Franchise Fee, Tax/Subsidy Policies and Economic Growth," MPRA Paper 27745, University Library of Munich, Germany.
  5. Lai, Chung-hui, 2013. "(In)determinacy, bargaining, and R&D policies in an economy with endogenous technological change," Economics Discussion Papers 2013-14, Kiel Institute for the World Economy.
  6. Pengfei Wang & Yi Wen, 2007. "Incomplete information and self-fulfilling prophecies," Working Papers, Federal Reserve Bank of St. Louis 2007-033, Federal Reserve Bank of St. Louis.
  7. Wang, Vey & Lai, Chung-Hui, 2011. "Franchise fee, competition and economic growth," Economic Modelling, Elsevier, vol. 28(5), pages 2090-2099, September.

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