Endogenous Firms and Endogenous Business Cycles
The paper is concerned with the implications of imperfect competition and endogenous determination of the number of firms for endogenous fluctuations in the simple overlapping generations model. If firms have market power on output markets and there is free entry, such that the number of firms is endogenous and variable, then two effects should be taken into account: the love of variety effect and the endogenous markup effect. Our main conclusions are: (i) both effects contribute positively to the occurrence of endogenous fluctuations around a single and unique steady state by relaxing the condition for cycles as compared to the condition in competitive models, and (ii) both effects contribute to create certain realistic features concerning the comovement of output, prices and wages over the endogenous cycle.
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