Business Cycles with Free Entry Ruled by Animal Spirits

Teresa Lloyd-Braga and Rodolphe Dos Santos Ferreira

No 3919, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The Paper approaches business cycles in terms of extrinsic uncertainty related, not to dynamic indeterminacy of intertemporal equilibria (in the neighborhood of an attractor) or to multiplicity of steady states (in non-linear models), but to static indeterminacy of free entry oligopolistic equilibria within each period. We consider an OLG economy in which firms, supplying differentiated goods within each one of many sectors, and producing under increasing returns-to-scale, compete in prices in perfectly contestable markets. The number of active firms is shown to vary across sectoral equilibria, depending upon the (correct) producers? conjectures on the actions of their competitors. These conjectures are assumed to be coordinated by some extrinsic Markov chain, thus generating endogenous shocks in both the markup factor and productivity, and resulting in perturbations of the dynamic system (as in the case of exogenous random shocks). Consumers? expectations may magnify the extrinsic uncertainty characterizing producers? conjectures. Since the source of fluctuations does not rely on dynamic indeterminacy, we can weaken the condition on the degree of increasing returns, which may be arbitrarily small (with a moderate positive elasticity of labour supply), provided goods substitutability within each sector becomes arbitrarily large.

Keywords: Business cycles; Animal spirits; Sunspots; Oligopoly; Free entry; Indeterminacy (search for similar items in EconPapers)
JEL-codes: D43 E32 L10 (search for similar items in EconPapers)
Date: 2003-06
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Business cycles with free entry ruled by animal spirits (2008)
Working Paper: Business cycles with free entry ruled by animal spirits (2007)
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