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Free entry and business cycles under the influence of animal spirits

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  • Rodolphe Dos Santos Ferreira

    (BETA - Bureau d'économie théorique et appliquée - CNRS : UMR7522 - Université Louis Pasteur - Strasbourg I)

  • Frederic Dufourt

    (BETA - Bureau d'économie théorique et appliquée - CNRS : UMR7522 - Université Louis Pasteur - Strasbourg I)

Abstract

We provide a business cycle model in which endogenous markup fluctuations are the main driving force. These fluctuations occur due to some form of 'animal spirits', impelling firms in their entry-exit decisions within each sector. By contrast to existing models of the business cycle emphasizing the role of animal spirits, we do not rely on the sink property of the equilibrium to generate indeterminacy. Hence, while our model does pretty well in accounting for the main features of US business cycles, it avoids several criticisms addressed to these former models, concerning either their dependence upon strongly increasing returns and too high markups, or their implication of countercyclical movements of consumption.

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Bibliographic Info

Paper provided by HAL in its series Post-Print with number halshs-00789030.

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Date of creation: 01 Mar 2006
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Publication status: Published, Journal of Monetary Economics, 2006, 53, 2, 311-328
Handle: RePEc:hal:journl:halshs-00789030

Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00789030
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Keywords: Business cycles; Animal spirits; Imperfect competition.;

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  1. Weder, Mark, 1997. "Animal spirits, technology shocks and the business cycle," SFB 373 Discussion Papers 1997,61, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  2. Caballero, Ricardo J. & Lyons, Richard K., 1992. "External effects in U.S. procyclical productivity," Journal of Monetary Economics, Elsevier, Elsevier, vol. 29(2), pages 209-225, April.
  3. Stephanie Schmitt-Grohe, 1999. "Endogenous business cycles and the dynamics of output, hours, and consumption," Departmental Working Papers, Rutgers University, Department of Economics 199915, Rutgers University, Department of Economics.
  4. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  5. Schmitt-Grohe, Stephanie, 1997. "Comparing Four Models of Aggregate Fluctuations due to Self-Fulfilling Expectations," Journal of Economic Theory, Elsevier, vol. 72(1), pages 96-147, January.
  6. Basu, Susanto & Fernald, John G, 1997. "Returns to Scale in U.S. Production: Estimates and Implications," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(2), pages 249-83, April.
  7. Benhabib, Jess & Farmer, Roger E.A., 1991. "Indeterminacy and Increasing Returns," Working Papers, C.V. Starr Center for Applied Economics, New York University 91-59, C.V. Starr Center for Applied Economics, New York University.
  8. Satyajit Chatterjee & Russell Cooper, 1993. "Entry and Exit, Product Variety and the Business Cycle," NBER Working Papers 4562, National Bureau of Economic Research, Inc.
  9. Caballero, R.J., 1990. "A Fallacy Of Composition," Discussion Papers, Columbia University, Department of Economics 1990_01, Columbia University, Department of Economics.
  10. Perli, Roberto, 1998. "Indeterminacy, home production, and the business cycle: A calibrated analysis," Journal of Monetary Economics, Elsevier, Elsevier, vol. 41(1), pages 105-125, February.
  11. Basu, S. & Fernald, J.G., 1993. "Are Apparent Productive Spillovers a Figment of Specification Error," Papers, Michigan - Center for Research on Economic & Social Theory 93-22, Michigan - Center for Research on Economic & Social Theory.
  12. Robert G. King & Sergio T. Rebelo, 2000. "Resuscitating Real Business Cycles," NBER Working Papers 7534, National Bureau of Economic Research, Inc.
  13. Roger E.A. Farmer & Jang Ting Guo, 1992. "Real Business Cycles and the Animal Spirits Hypothesis," UCLA Economics Working Papers, UCLA Department of Economics 680, UCLA Department of Economics.
  14. Novshek, William, 1980. "Cournot Equilibrium with Free Entry," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 47(3), pages 473-86, April.
  15. d'ASPREMONT, Claude & DOS SANTOS FERREIRA, Rodolphe & GERARD-VARET, Louis-André, . "Contestability and the indeterminacy of free-entry equilibria," CORE Discussion Papers RP -1452, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  16. Benhabib, Jess & Farmer, Roger E A, 1996. "Indeterminacy and Sector-specific Externalities," CEPR Discussion Papers 1403, C.E.P.R. Discussion Papers.
  17. Franck PORTIER, 1995. "Business Formation and Cyclical Markups in the French Business Cycle," Annales d'Economie et de Statistique, ENSAE, issue 37-38, pages 411-440.
  18. Gali Jordi, 1994. "Monopolistic Competition, Business Cycles, and the Composition of Aggregate Demand," Journal of Economic Theory, Elsevier, vol. 63(1), pages 73-96, June.
  19. Wen, Yi, 1998. "Capacity Utilization under Increasing Returns to Scale," Journal of Economic Theory, Elsevier, vol. 81(1), pages 7-36, July.
  20. Benhabib, Jess & Farmer, Roger E.A., 1999. "Indeterminacy and sunspots in macroeconomics," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 6, pages 387-448 Elsevier.
  21. Satyajit Chatterjee & Russell W. Cooper & B. Ravikumar, 1993. "Strategic complementarity in business formation: aggregate fluctuations and sunspot equilibria," Working Papers 93-9, Federal Reserve Bank of Philadelphia.
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