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Free entry and business cycles under the influence of animal spirits

  • Rodolphe Dos Santos Ferreira

    (BETA - Bureau d'économie théorique et appliquée - CNRS : UMR7522 - Université Louis Pasteur - Strasbourg I)

  • Frederic Dufourt

    (BETA - Bureau d'économie théorique et appliquée - CNRS : UMR7522 - Université Louis Pasteur - Strasbourg I)

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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Paper provided by HAL in its series Post-Print with number halshs-00789030.

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Date of creation: 01 Mar 2006
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Publication status: Published, Journal of Monetary Economics, 2006, 53, 2, 311-328
Handle: RePEc:hal:journl:halshs-00789030
Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00789030
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  16. Roger E.A. Farmer & Jang Ting Guo, 1992. "Real Business Cycles and the Animal Spirits Hypothesis," UCLA Economics Working Papers 680, UCLA Department of Economics.
  17. 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.
  18. Weder, Mark, 2000. "Animal spirits, technology shocks and the business cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 24(2), pages 273-295, February.
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  22. Frederic Dufourt & Rodolphe Dos Santos Ferreira, . "Indeterminacy of Free Entry Equilibria: General Approach and Macroeconomic Applications," EcoMod2006 272100021, EcoMod.
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