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Exit and Entry, Increasing Returns to Specialization, and Business Cycles

Author

Listed:
  • Michael B. Devereux
  • Allen C. Head
  • Beverly J. Lapham

Abstract

The effects of entry and exit by monopolistically competitive intermediate goods producers on equilibrium business cycles are analyzed in the presence of internal returns to scale and external returns to specialization. In the environment studied, market power and endogenous entry and exit, in themselves, have little effect on the propagation of technology shocks. In contrast, internal returns to scale dampen the effects of these shocks while external returns to specialization produce a multiplier which accentuates their effects. The multiplier arises as entry and exit of firms over the business cycle causes endogenous fluctuations in the productivity of intermediate inputs. These endogenous productivity fluctuations cause the Solow residual both to mismeasure technology shocks and to be strongly correlated with government spending shocks. The results also indicate that the extent to which technology shock can account for aggregate fluctuations may be greater than suggested by competitive real business cycle models.

Suggested Citation

  • Michael B. Devereux & Allen C. Head & Beverly J. Lapham, 1993. "Exit and Entry, Increasing Returns to Specialization, and Business Cycles," Working Papers 871, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:871
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    File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_871.pdf
    File Function: First version 1993
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    Cited by:

    1. 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.
    2. Boyan Jovanovic & Saul Lach, 1993. "Diffusion Lags and Aggregate Fluctuations. New Name: Product Innovation and the Business Cycle," NBER Working Papers 4455, National Bureau of Economic Research, Inc.
    3. Ambler, Steve & Cardia, Emanuela & Farazli, Jeannine, 1999. "Export promotion, learning by doing and growth," Journal of Economic Dynamics and Control, Elsevier, vol. 23(5-6), pages 747-772, April.
    4. Portier, Franck, 1995. "Le rôle des variations de taux de marge dans les fluctuations macroéconomiques conjoncturelles," L'Actualité Economique, Société Canadienne de Science Economique, vol. 71(2), pages 218-249, juin.

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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