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Business cycles with free entry ruled by animal spirits

  • Dos Santos Ferreira, Rodolphe
  • Lloyd-Braga, Teresa

We approach business cycles on the basis of extrinsic uncertainty, related to static indeterminacy of free entry oligopolistic equilibria. Firms, producing under increasing returns to scale, compete in prices in contestable markets. The number of active firms varies across sectoral equilibria, which depend upon (correct) producers' conjectures on competitors' actions. Coordination of these conjectures by some Markov chain generates endogenous shocks in markups and productivity. Consumers' expectations may in addition magnify this extrinsic uncertainty. As the source of fluctuations does not rely on dynamic indeterminacy, the required degree of increasing returns may be arbitrarily small, provided goods substitutability within each sector becomes arbitrarily large.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 32 (2008)
Issue (Month): 11 (November)
Pages: 3502-3519

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Handle: RePEc:eee:dyncon:v:32:y:2008:i:11:p:3502-3519
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  1. Benhabib, Jess & Farmer, Roger E.A., 1996. "Indeterminacy and Sector-Specific Externalities," Working Papers 96-12, C.V. Starr Center for Applied Economics, New York University.
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