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Entry dynamics as a solution to the puzzling behaviour of real marginal costs in the Ghironi-Melitz model

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  • Alberto Felettigh

    ()
    (Bank of Italy)

Abstract

The work of Ghironi and Melitz (2005) is at the frontier of international real business cycle (IRBC) models with heterogeneous firms. In their model, the dynamic behaviour of real marginal costs is puzzling: a positive technology shock hitting the home country makes it permanently less cost-effective than the foreign economy. Wages grow more than profits during booms and the labour share in GDP is counterfactually procyclical. Entry by new firms is crucial in delivering this result. It is sufficient to posit that technology improvements are more efficacious in manufacturing than in the "production of new firms" for the labour share and real marginal costs to become countercyclical, consistently with empirical evidence. Once I introduce tradable capital goods and endogenous labour supply, the two models are on average equally good in replicating the empirical moments typically considered in the IRBC literature.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 854.

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Date of creation: Feb 2012
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Handle: RePEc:bdi:wptemi:td_854_12

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Keywords: international real business cycles; firm heterogeneity; firm entry dynamics; real marginal costs; labour share;

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  1. Fabio Ghironi & Marc J. Melitz, 2004. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," Boston College Working Papers in Economics 599, Boston College Department of Economics.
  2. Andrew B. Bernard & J. Bradford Jensen & Stephen J. Redding & Peter K. Schott, 2011. "The Empirics of Firm Heterogeneity and International Trade," CEP Discussion Papers dp1084, Centre for Economic Performance, LSE.
  3. Backus, David K. & Smith, Gregor W., 1993. "Consumption and real exchange rates in dynamic economies with non-traded goods," Journal of International Economics, Elsevier, vol. 35(3-4), pages 297-316, November.
  4. Michael P. Keane & Richard Rogerson, 2012. "Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective," Economics Papers 2012-W12, Economics Group, Nuffield College, University of Oxford.
  5. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2012. "Endogenous Entry, Product Variety, and Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 304 - 345.
  6. V.V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," NBER Working Papers 7869, National Bureau of Economic Research, Inc.
  7. Andrew B. Bernard & J. Bradford Jensen, 2000. "Exporting and Productivity," Working Papers 00-07, Center for Economic Studies, U.S. Census Bureau.
  8. Alessandro Barattieri & Susanto Basu & Peter Gottschalk, 2010. "Some evidence on the importance of sticky wages," Working Papers 10-11, Federal Reserve Bank of Boston.
  9. Stephen Redding, 2010. "Theories of Heterogeneous Firms and Trade," CEP Discussion Papers dp0994, Centre for Economic Performance, LSE.
  10. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  11. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
  12. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-21, September.
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