Endogenous Entry, Product Variety, and Business Cycles

Details

Serval ID
serval:BIB_10F26DD239CE
Type
Article: article from journal or magazin.
Collection
Publications
Title
Endogenous Entry, Product Variety, and Business Cycles
Journal
Journal of Political Economy
Author(s)
Bilbiie F.O., Ghironi F., Melitz M.J.
ISSN
0022-3808
1537-534X
Publication state
Published
Issued date
04/2012
Peer-reviewed
Oui
Volume
120
Number
2
Pages
304-345
Language
english
Abstract
This paper builds a framework for the analysis of macroeconomic fluctuations that incorporates
the endogenous determination of the number of producers and products over the business
cycle. Economic expansions induce higher entry rates by prospective entrants subject to irreversible
investment costs. The sluggish response of the number of producers (due to sunk entry
costs and a time-to-build lag) generates a new and potentially important endogenous propagation
mechanism for real business cycle models. The return to investment (corresponding to the
creation of new productive units) determines household saving decisions, producer entry, and
the allocation of labor across sectors. The model performs at least as well as the benchmark real
business cycle model with respect to the implied second-moment properties of key macroeconomic
aggregates. In addition, our framework jointly predicts procyclical product variety and
procyclical profits even for preference specifications that imply countercyclical markups. When
we include physical capital, the model can simultaneously reproduce most of the variance of
GDP, hours worked, and total investment found in the data.
Keywords
Business cycle propagation, Entry, Markups, Product creation, Profits, Variety.
Web of science
Create date
01/11/2018 8:04
Last modification date
20/08/2019 12:38
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