Business cycles with free entry ruled by animal spirits

Rodolphe dos Santos Ferreira*, Teresa Lloyd-Braga

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

6 Citations (Scopus)

Abstract

We approach business cycles on the basis of extrinsic uncertainty, related to static indeterminacy of free entry oligopolistic equilibria. Firms, producing under increasing returns to scale, compete in prices in contestable markets. The number of active firms varies across sectoral equilibria, which depend upon (correct) producers' conjectures on competitors' actions. Coordination of these conjectures by some Markov chain generates endogenous shocks in markups and productivity. Consumers' expectations may in addition magnify this extrinsic uncertainty. As the source of fluctuations does not rely on dynamic indeterminacy, the required degree of increasing returns may be arbitrarily small, provided goods substitutability within each sector becomes arbitrarily large.
Original languageEnglish
Pages (from-to)3502-3519
Number of pages18
JournalJournal of Economic Dynamics and Control
Volume32
Issue number11
DOIs
Publication statusPublished - 1 Nov 2008

Keywords

  • Business cycles
  • Free entry equilibrium
  • Indeterminacy
  • Sunspots

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