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Endogenous Entry, Product Variety and Business Cycles

  • Florin Bilbiie

    ()

    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

  • Fabio Ghironi

    (Department of Economics - Boston College)

  • Marc Melitz

    (Department of Economics - Harvard university (Cambridge, USA))

This paper builds a framework for the analysis of macroeconomic fluctuations that incorporates the endogenous determination of the number of producers and products 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 sunk entry costs and a time-to-build lag) generates a new and potentially important endogenous propagation mechanism for real business cycle models. The return to 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 procyclical product variety and procyclical profits even for preference specifications that imply countercyclical markups. When we include physical capital, the model can simultaneously reproduce most of the variance of GDP, hours worked, and total investment found in the data.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number hal-00680634.

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Date of creation: 2012
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Publication status: Published, Journal of Political Economy, 2012, 120, 2, 304-345
Handle: RePEc:hal:cesptp:hal-00680634
Note: View the original document on HAL open archive server: http://hal-paris1.archives-ouvertes.fr/hal-00680634
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  1. Steve Ambler & Emanuela Cardia, 1998. "The Cyclical Behaviour of Wages and Profits under Imperfect Competition," Canadian Journal of Economics, Canadian Economics Association, vol. 31(1), pages 148-164, February.
  2. Giancarlo Corsetti & Philippe Martin & Paolo A. Pesenti, 2005. "Productivity Spillovers, Terms of Trade and the "Home Market Effect"," NBER Working Papers 11165, National Bureau of Economic Research, Inc.
  3. Dos Santos Ferreira, Rodolphe & Dufourt, Frederic, 2006. "Free entry and business cycles under the influence of animal spirits," Journal of Monetary Economics, Elsevier, vol. 53(2), pages 311-328, March.
  4. colciago, andrea & Rossi, Lorenza, 2011. "Endogenous Market Structures and the Business Cycle," MPRA Paper 29629, University Library of Munich, Germany.
  5. Nir Jaimovich, 2004. "Firm Dynamics, Markup Variations, and the Business Cycle," Discussion Papers 07-013, Stanford Institute for Economic Policy Research, revised Mar 2007.
  6. Cook, David, 2001. "Time to enter and business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 25(8), pages 1241-1261, August.
  7. Roberto M. Samaniego, 2008. "Entry, Exit and Business Cycles in a General Equilibrium Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 529-541, July.
  8. Satyajit Chatterjee & Russell Cooper, 2014. "Entry And Exit, Product Variety, And The Business Cycle," Economic Inquiry, Western Economic Association International, vol. 52(4), pages 1466-1484, October.
  9. Enchuan Shao & Pedro Silos, 2008. "Firm entry and labor market dynamics," Working Paper 2008-17, Federal Reserve Bank of Atlanta.
  10. Den Haan, Wouter & Sedlacek, Petr, 2009. "Inefficient employment decisions, entry costs, and the cost of fluctuations," CEPR Discussion Papers 7468, C.E.P.R. Discussion Papers.
  11. Yoonsoo Lee & Toshihiko Mukoyama, 2008. "Entry, exit and plant-level dynamics over the business cycle," Working Paper 0718, Federal Reserve Bank of Cleveland.
  12. Vivien Lewis, 2006. "Macroeconomic fluctuations and firm entry : theory and evidence," Working Paper Research 103, National Bank of Belgium.
  13. Devereux, Michael B. & Head, Allen C. & Lapham, Beverly J., 1996. "Aggregate fluctuations with increasing returns to specialization and scale," Journal of Economic Dynamics and Control, Elsevier, vol. 20(4), pages 627-656, April.
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