Endogenous Entry, Product Variety, and Business Cycles / Florin Bilbiie, Fabio Ghironi, Marc J. Melitz.

Format:

Book

Author/Creator:

Bilbiie, Florin.

Contributor:

National Bureau of Economic Research.

Ghironi, Fabio.

Melitz, Marc J.

Series:

Working Paper Series (National Bureau of Economic Research) no. w13646.

NBER working paper series no. w13646

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2007.

Summary:

This paper builds a framework for the analysis of macroeconomic fluctuations that incorporates the endogenous determination of the number of producers 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 the sunk entry costs) generates a new and potentially important endogenous propagation mechanism for real business cycle models. The stock-market price of 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 a procyclical number of producers and procyclical profits even for preference specifications that imply countercyclical markups. When we include physical capital, the model can reproduce the variance and autocorrelation of GDP found in the data.

Notes:

Print version record

November 2007.