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Firm Dynamics and Markup Variations: Implications for Sunspot Equilibria and Endogenous Economic Fluctuation

  • Nir Jaimovich

    ()

    (Economics Department, Stanford University)

This paper analyzes how the interaction between firms’ entry-and-exit decisions and variations in competition gives rise to self-fulfilling, expectation-driven fluctuations in aggregate economic activity and in measured total factor productivity (TFP). The analysis is based on a dynamic general equilibrium model in which net business formation is endogenously procyclical and leads to endogenous countercyclical variations in markups. This interaction leads to indeterminacy in which economic fluctuations occur as a result of self-fulfilling shifts in the beliefs of rational forward looking agents. When calibrated with empirically plausible parameter values and driven solely by self-fulfilling shocks to expectations, the model can quantitatively account for the main empirical regularities characterizing postwar U.S. business cycles and for 65% of the fluctuations in measured TFP.

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Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 07-011.

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Date of creation: Oct 2007
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Handle: RePEc:sip:dpaper:07-011
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