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Imperfect competition and indeterminacy of aggregate output

  • Pengfei Wang
  • Yi Wen

This paper shows imperfect competition can lead to indeterminacy in aggregate output in a standard DSGE model with imperfect competition. Indeterminacy arises in the model from the composition of aggregate output. In sharp contrast to the indeterminacy literature pioneered by Benhabib and Farmer [3] and Gali [19], indeterminacy in our model is global; hence it is more robust to structural parameters. In addition, sunspots in our model can be autocorrelated. The paper provides a justification for exogenous variations in desired markups, which play an important role as a source of cost-push shocks in the monetary policy literature. Our model outperforms a standard RBC model driven by technology shocks in several dimensions, including the volatility of labor market and the hump-shaped output dynamics.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2006-017.

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Date of creation: 2007
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Handle: RePEc:fip:fedlwp:2006-017
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