The Paper approaches business cycles in terms of extrinsic uncertainty related, not to dynamic indeterminacy of intertemporal equilibria (in the neighborhood of an attractor) or to multiplicity of steady states (in non-linear models), but to static indeterminacy of free entry oligopolistic equilibria within each period. We consider an OLG economy in which firms, supplying differentiated goods within each one of many sectors, and producing under increasing returns-to-scale, compete in prices in perfectly contestable markets. The number of active firms is shown to vary across sectoral equilibria, depending upon the (correct) producers’ conjectures on the actions of their competitors. These conjectures are assumed to be coordinated by some extrinsic Markov chain, thus generating endogenous shocks in both the markup factor and productivity, and resulting in perturbations of the dynamic system (as in the case of exogenous random shocks). Consumers’ expectations may magnify the extrinsic uncertainty characterizing producers’ conjectures. Since the source of fluctuations does not rely on dynamic indeterminacy, we can weaken the condition on the degree of increasing returns, which may be arbitrarily small (with a moderate positive elasticity of labour supply), provided goods substitutability within each sector becomes arbitrarily large.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
3919.
Find related papers by JEL classification: D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
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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.
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