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Business cycles with free entry ruled by animal spirits

Author

Listed:
  • Rodolphe dos Santos Ferreira

    (BETA - Bureau d'Économie Théorique et Appliquée - INRA - Institut National de la Recherche Agronomique - UNISTRA - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique, IUF - Institut universitaire de France - M.E.N.E.S.R. - Ministère de l'Education nationale, de l’Enseignement supérieur et de la Recherche)

  • Teresa Lloyd-Braga

    (FCEE - Faculdade de Ciencias Economicas e Empresariais - Universidade Católica Portuguesa [Porto])

Abstract

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.

Suggested Citation

  • Rodolphe dos Santos Ferreira & Teresa Lloyd-Braga, 2007. "Business cycles with free entry ruled by animal spirits," Post-Print hal-00279266, HAL.
    • Handle: RePEc:hal:journl:hal-00279266
    DOI: 10.1016/j.jedc.2007.06.018
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    Cited by:

    1. is not listed on IDEAS
    2. Pavlov, Oscar & Weder, Mark, 2012. "Variety matters," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 629-641.
    3. Mauro Bambi & Alain Venditti, 2021. "Time‐varying consumption tax, productive government spending, and aggregate instability," International Journal of Economic Theory, The International Society for Economic Theory, vol. 17(2), pages 190-215, June.
    4. Lloyd-Braga, Teresa & Modesto, Leonor & Seegmuller, Thomas, 2014. "Market distortions and local indeterminacy: A general approach," Journal of Economic Theory, Elsevier, vol. 151(C), pages 216-247.
    5. Vera Ivanova & Philip Ushchev, 2019. "Product Differentiation, Competitive Toughness, and Intertemporal Substitution," Scandinavian Journal of Economics, Wiley Blackwell, vol. 121(3), pages 1244-1269, July.
    6. Vera Ivanova & Philip Ushchev, 2015. "When Ricardo Meets Chamberlin: A Simple Dynamic Model Of Monopolistic Competition," HSE Working papers WP BRP 99/EC/2015, National Research University Higher School of Economics.
    7. Frederic Dufourt & Rodolphe Dos Santos Ferreira, 2006. "Indeterminacy of Free Entry Equilibria: General Approach and Macroeconomic Applications," EcoMod2006 272100021, EcoMod.
    8. Cheng-wei Chang & Ching-chong Lai, 2021. "Optimal fiscal policies and market structures with monopolistic competition," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(6), pages 1385-1411, December.
    9. Takashi Kamihigashi, 2017. "Regime-Switching Sunspot Equilibria in a One-Sector Growth Model with Aggregate Decreasing Returns and Small Externalities," Studies in Economic Theory, in: Kazuo Nishimura & Alain Venditti & Nicholas C. Yannelis (ed.), Sunspots and Non-Linear Dynamics, chapter 0, pages 125-146, Springer.
    10. Vera Ivanova & Filipp Ushchev, 2019. "Product Differentiation, Competitive Toughness, and Intertemporal Substitution," ULB Institutional Repository 2013/387744, ULB -- Universite Libre de Bruxelles.
    11. Maria José Gil-Moltó & Dimitrios Varvarigos, 2012. "Industry Dynamics and Indeterminacy in an OLG Economy with Endogenous Occupational Choice," Discussion Papers in Economics 12/09, Division of Economics, School of Business, University of Leicester, revised Sep 2012.
    12. Pavlov, Oscar & Weder, Mark, 2012. "Variety matters," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 629-641.
    13. Chang Cheng-Wei & Lai Ching-Chong, 2017. "Macroeconomic (in)stability and endogenous market structure with productive government expenditure," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 21(2), pages 1-16, April.
    14. Thomas Seegmuller, 2005. "Steady state analysis and endogenous fluctuations in a finance constrained model," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00194358, HAL.
    15. Nicolas Abad, 2019. "Firms' Labor Market Power and Aggregate Instability," Working Papers hal-02329802, HAL.

    More about this item

    Keywords

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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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