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Business Cycles with Endogenous Mark-ups

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  • Paulo Brito

    (UECE-ISEG, Technical University of Lisbon)

  • Luis Costa

    (UECE-ISEG, Technical University of Lisbon)

  • Huw Dixon

    (Department of Economics, University York, UK)

Abstract

Endogenous mark-ups have been a matter of interest in macroeconomics, especially from the middle 1990’s onwards. However, the complexity of this class of models, does not allow general ualitative conclusions in most cases, and there is plenty of room for investigation, especially in the reasons driving the emergence of multiple equilibria and non-saddle-point dynamics. In this article we extend a simple dynamic general equilibrium model to include the possibility of strategic interaction between producers in each industry, and entry affects the level of macroeconomic efficiency through an endogenous mark-up. We demonstrate multiple equilibria is a likely outcome even in an exogenous labour-supply framework. A pair of equilibria exists (a stable and an unstable one) and they are connected through a heteroclinic orbit. When we allow labour supply to vary, a third equilibrium may emerge if the government is present in the economy, and local indeterminacy may exist

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Bibliographic Info

Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2006 with number 108.

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Date of creation: 02 Feb 2007
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Handle: RePEc:mmf:mmfc06:108

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Web page: http://www.essex.ac.uk/afm/mmf/index.html

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Keywords: Endogenous mark-ups; Multiple equilibria; Local dynamics;

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  1. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
  2. d ASPREMONT, Claude, & DOS SANTOS FERREIRA , Rodolphe & GERARD-VARET , Louis-André, 1994. "Market Power, Coordination Failures and Endogenous Fluctuations," CORE Discussion Papers 1994068, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Rotemberg, Julio J. & Woodford, Michael, 1999. "The cyclical behavior of prices and costs," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 16, pages 1051-1135 Elsevier.
  4. L Kaas & P Madden, 2002. "Imperfectly Competitive Cycles with Keynesian and Walrasian Features," The School of Economics Discussion Paper Series 0211, Economics, The University of Manchester.
  5. d'Aspremont, Claude & Dos Santos Ferreira, Rodolphe & Gerard-Varet, Louis-Andre, 1997. "General Equilibrium Concepts under Imperfect Competition: A Cournotian Approach," Journal of Economic Theory, Elsevier, vol. 73(1), pages 199-230, March.
  6. Dixon,Huw David & Rankin,Neil, 1995. "The New Macroeconomics," Cambridge Books, Cambridge University Press, number 9780521479479, November.
  7. Julio J. Rotemberg & Michael Woodford, 1991. "Markups and the Business Cycle," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 63-140 National Bureau of Economic Research, Inc.
  8. Chatterjee, Satyajit & Cooper, Russell & Ravikumar, B, 1993. "Strategic Complementarity in Business Formation: Aggregate Fluctuations and Sunspot Equilibria," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 795-811, October.
  9. Jean-Pierre LAFFARGUE, 1995. "A Dynamic Model of the French Economy, with Rational Expectations, Monopolistic Competition and Labour Market Bargaining," Annales d'Economie et de Statistique, ENSAE, issue 37-38, pages 465-530.
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