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Endogenous Entry, Product Variety, and Business Cycles

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Author Info
Florin Bilbiie
Fabio Ghironi
Marc J. Melitz

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Abstract

This paper builds a framework for the analysis of macroeconomic fluctuations that incorporates the endogenous determination of the number of producers over the business cycle. Economic expansions induce higher entry rates by prospective entrants subject to irreversible investment costs. The sluggish response of the number of producers (due to the sunk entry costs) generates a new and potentially important endogenous propagation mechanism for real business cycle models. The stock-market price of investment (corresponding to the creation of new productive units) determines household saving decisions, producer entry, and the allocation of labor across sectors. The model performs at least as well as the benchmark real business cycle model with respect to the implied second-moment properties of key macroeconomic aggregates. In addition, our framework jointly predicts a procyclical number of producers and procyclical profits even for preference specifications that imply countercyclical markups. When we include physical capital, the model can reproduce the variance and autocorrelation of GDP found in the data.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13646.

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Date of creation: Nov 2007
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Handle: RePEc:nbr:nberwo:13646

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Find related papers by JEL classification:
E20 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Argia M. Sbordone, 2008. "Globalization and inflation dynamics: the impact of increased competition," Staff Reports 324, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  2. Boyan Jovanovic, 2007. "Investment Options and the Business Cycle," NBER Working Papers 13307, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Yoonsoo Lee & Toshihiko Mukoyama, 2008. "Entry, exit and plant-level dynamics over the business cycle," Working Paper 0718, Federal Reserve Bank of Cleveland. [Downloadable!]
    Other versions:
  4. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2007. "Monetary Policy and Business Cycles with Endogenous Entry and Product Variety," NBER Working Papers 13199, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Lewis, Vivien, 2008. "Business cycle evidence on firm entry," Discussion Paper Series 1: Economic Studies 2008,08, Deutsche Bundesbank, Research Centre. [Downloadable!]
  6. Lenno Uuskyla, 2007. "Firm entry and liquidity," Bank of Estonia Working Papers 2007-06, Bank of Estonia, revised 26 Aug 2007. [Downloadable!]
  7. Ippei Fujiwara & nd Naohisa Hirakata, 2007. "Dynamic Aspects of Productivity Spillovers, Terms of Trade and The "Home Market Effects"," IMES Discussion Paper Series 07-E-07, Institute for Monetary and Economic Studies, Bank of Japan. [Downloadable!]
  8. Federico S. Mandelman & Gabriel V. Montes Rojas, 2007. "Microentrepreneurship and the business cycle: is self-employment a desired outcome?," Working Paper 2007-15, Federal Reserve Bank of Atlanta. [Downloadable!]
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