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A Simple Business-Cycle Model with Schumpeterian Features

  • Luis F Costa
  • Huw D Dixon

We develop a dynamic general equilibrium model of imperfect competition where a sunk cost of creating a new product regulates the type of entry that dominates in the economy: new products or more competition in existing industries. Considering the process of product innovation is irreversible, introduces hysteresis in the business cycle. Expansionary shocks may lead the economy to a new 'prosperity plateau,' but contractionary shocks only affect the market power of mature industries.

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Paper provided by Department of Economics, University of York in its series Discussion Papers with number 05/30.

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Handle: RePEc:yor:yorken:05/30
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  1. Julio J. Rotemberg & Michael Woodford, 1999. "The Cyclical Behavior of Prices and Costs," NBER Working Papers 6909, National Bureau of Economic Research, Inc.
  2. Gali, J., 1991. "Monopolistic Competition, Business Cycles and the Composition of Aggregate Demand," Papers 92-03, Columbia - Graduate School of Business.
  3. Devereux, Michael B & Head, Allen C & Lapham, Beverly J, 1996. "Monopolistic Competition, Increasing Returns, and the Effects of Government Spending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(2), pages 233-54, May.
  4. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  5. Joaquim Oliveira Martins & Stefano Scarpetta, 1999. "The Levels and Cyclical Behaviour of Mark-ups Across Countries and Market Structures," OECD Economics Department Working Papers 213, OECD Publishing.
  6. Luís F. Costa, 2004. "Endogenous Markups and Fiscal Policy," Manchester School, University of Manchester, vol. 72(s1), pages 55-71, 09.
  7. Heijdra, Ben J & van der Ploeg, Frederick, 1996. "Keynesian Multipliers and the Cost of Public Funds under Monopolistic Competition," Economic Journal, Royal Economic Society, vol. 106(438), pages 1284-96, September.
  8. Startz, Richard, 1989. "Monopolistic Competition as a Foundation for Keynesian Macroeconomic Models," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 737-52, November.
  9. Satyajit Chatterjee & Russell W. Cooper & B. Ravikumar, 1993. "Strategic complementarity in business formation: aggregate fluctuations and sunspot equilibria," Working Papers 93-9, Federal Reserve Bank of Philadelphia.
  10. Franck PORTIER, 1995. "Business Formation and Cyclical Markups in the French Business Cycle," Annales d'Economie et de Statistique, ENSAE, issue 37-38, pages 411-440.
  11. Dixon, Huw & Lawler, Phillip, 1996. " Imperfect Competition and the Fiscal Multiplier," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(2), pages 219-31, June.
  12. Heijdra, Ben J, 1998. "Fiscal Policy Multipliers: The Role of Monopolistic Competition, Scale Economies, and Intertemporal Substitution in Labour Supply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 659-96, August.
  13. Costa, Luis F, 2001. "Can Fiscal Policy Improve Welfare in a Small Dependent Economy with Feedback Effects," Manchester School, University of Manchester, vol. 69(4), pages 418-39, September.
  14. Jean-Pierre LAFFARGUE, 1995. "A Dynamic Model of the French Economy, with Rational Expectations, Monopolistic Competition and Labour Market Bargaining," Annales d'Economie et de Statistique, ENSAE, issue 37-38, pages 465-530.
  15. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
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