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Entry and markup dynamics in an estimated business cycle model

  • Vivien LEWIS
  • Arnaud STEVENS

How do changes in market structure affect the US business cycle? We estimate a monetary DSGE model with endogenous firm/product entry and a translog expenditure function by Bayesian methods. The dynamics of net business formation allow us to identify the extent to which desired price markups and inflation decrease when entry rises. We find that a 1 percent increase in the number of competitors lowers desired markups by 0.17 percent. While markup fluctuations due to sticky prices or exogenous shocks account for a large proportion of US inflation variability, endogenous changes in desired markups also play a non-negligible role.

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Paper provided by KU Leuven, Faculty of Economics and Business, Department of Economics in its series Working Papers Department of Economics with number ces13.20.

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Date of creation: Oct 2013
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Handle: RePEc:ete:ceswps:ces13.20
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