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Free entry and business cycles under the influence of animal spirits

  • Dos Santos Ferreira, Rodolphe
  • Dufourt, Frederic

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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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 53 (2006)
Issue (Month): 2 (March)
Pages: 311-328

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Handle: RePEc:eee:moneco:v:53:y:2006:i:2:p:311-328
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  18. Basu, Susanto & Fernald, John G, 1997. "Returns to Scale in U.S. Production: Estimates and Implications," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 249-83, April.
  19. 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.
  20. Benhabib, Jess & Farmer, Roger E.A., 1999. "Indeterminacy and sunspots in macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 6, pages 387-448 Elsevier.
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  22. Franck PORTIER, 1995. "Business Formation and Cyclical Markups in the French Business Cycle," Annals of Economics and Statistics, GENES, issue 37-38, pages 411-440.
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