Hostname: page-component-74656f9884-j7cmm Total loading time: 0 Render date: 2026-11-08T16:21:45.758Z Has data issue: false hasContentIssue false
  • English
  • Français

EQUILIBRIUM INDETERMINACY, ENDOGENOUS ENTRY AND EXIT, AND INCREASING RETURNS TO SPECIALIZATION

Published online by Cambridge University Press:  26 February 2021

Shu-Hua Chen  and
Jang-Ting Guo
Shu-Hua Chen
Affiliation:
National Taipei University
Jang-Ting Guo*
Affiliation:
University of California, Riverside
*
Address correspondence to: Jang-Ting Guo, Department of Economics, University of California, Riverside, Riverside, CA 92521, USA. e-mail: guojt@ucr.edu. Phone: 1-951-827-1588. Fax: 1-951-827-5685.
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the 'Save PDF' action button.

This paper systematically examines the interrelations between equilibrium indeterminacy, endogenous entry and exit of intermediate input firms, and increasing returns to specialization within two versions of a parsimonious one-sector monopolistically competitive RBC model. The technology for producing an intermediate good is postulated to display internal increasing returns to scale in our benchmark framework, whereas positive productive externalities are considered in the alternative setting. We analytically show that either formulation will exhibit belief-driven cyclical fluctuations provided the equilibrium wage-hours locus is positively sloped and steeper than the household’s labor supply curve. We also find that ceteris paribus our alternative macroeconomy is more susceptible to indeterminacy and sunspots than the baseline counterpart.

Keywords

Equilibrium IndeterminacyEndogenous Entry and ExitIncreasing Returns to Specialization

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 7 , October 2022 , pp. 1756 - 1774
Copyright
© Cambridge University Press 2021

Footnotes

We thank two anonymous referees, William Barnett (Editor), Roger Farmer (Co-Editor), Juin-Jen Chang, Been-Lon Chen, Miroslav Gabrovski, Sharon Harrison, Victor Ortego-Marti, Wei-Neng Wang, and Mark Weder for helpful comments and discussions. Part of this research was conducted while Guo was a visiting research fellow of economics at Academia Sinica, Taipei, Taiwan, whose hospitality is greatly appreciated. Of course, all remaining errors are our own.

References

Ardelean, A. (2011) How Strong is the Love of Variety? Unpublished Manuscript, Santa Clara University.Google Scholar
Basu, S. and Fernald, J. G. (1997) Returns to scale in U.S. production: estimates and implications. Journal of Political Economy 105, 249–283.CrossRefGoogle Scholar
Bénassy, J.-P. (1996) Monopolistic competition, increasing returns to specialization and output persistence. Economic Letters 52, 187–191.CrossRefGoogle Scholar
Benhabib, J. and Farmer, R. E. A. (1994) Indeterminacy and increasing returns. Journal of Economic Theory 63, 19–41.10.1006/jeth.1994.1031CrossRefGoogle Scholar
Benhabib, J. and Farmer, R. E. A. (1996) Indeterminacy and sector-specific externalities. Journal of Monetary Economics 37, 421–444.CrossRefGoogle Scholar
Benhabib, J. and Farmer, R. E. A. (1999) Indeterminacy and sunspots in macroeconomics. In Taylor, J. and Woodford, M. (eds.), Handbook of Macroeconomics, pp. 387–448. Amsterdam: North Holland.CrossRefGoogle Scholar
Bernard, A. B., Redding, S. J. and Schott, P. K. (2010) Multi-product firms and product switching. American Economic Review 100, 70–97.10.1257/aer.100.1.70CrossRefGoogle Scholar
Broda, C. and Weinstein, D. E. (2010) Product creation and destruction: evidence and price implications. American Economic Review 100, 691–732.10.1257/aer.100.3.691CrossRefGoogle Scholar
Burnside, C. (1996) Production function regression, returns to scale, and externalities. Journal of Monetary Economics 37, 177–201.10.1016/S0304-3932(96)90033-1CrossRefGoogle Scholar
Chang, J.-J., Hung, H.-W. and Huang, C.-C. (2011) Monopoly power, increasing returns to variety, and local indeterminacy. Review of Economic Dynamics 14, 384–388.CrossRefGoogle Scholar
Davis, S. J. and Haltiwanger, J. (1990) Gross job creation and destruction: microeconomic evidence and macroeconomic implications. National Bureau of Economic Research Macroeconomics Annual 5, 126–168.Google Scholar
Devereux, M. B., Head, A. C. and Lapham, B. J. (1993) Monopolistic competition, technology shocks and aggregate fluctuations. Economic Letters 41, 57–61.CrossRefGoogle Scholar
Devereux, M. B., Head, A. C. and Lapham, B. J. (1996) Monopolistic Competition, increasing returns, and the effects of government spending. Journal of Money, Credit and Banking 28, 233–254.CrossRefGoogle Scholar
Devereux, M. B., Head, A. C. and Lapham, B. J. (2000) Government spending and welfare with returns to specialization. Scandinavian Journal of Economics 102, 547–561.CrossRefGoogle Scholar
Feenstra, R. and Kee, H. L. (2008) Export variety and country productivity: Estimating the monopolistic competition model with endogenous productivity. Journal of International Economics 74, 500–518.CrossRefGoogle Scholar
Funke, M. and Ruhwedel, R. (2001) Product variety and economic growth: Empirical evidence for the OECD countries. IMF Staff Papers 48, 225–242.Google Scholar
Harrison, S. G. (2001) Indeterminacy in a model with sector-specific externalities. Journal of Economic Dynamics and Control 25, 747–764.10.1016/S0165-1889(99)00040-8CrossRefGoogle Scholar
Jaimovich, N. and Floetotto, M. (2008) Firm dynamics, markup variations and the business cycle. Journal of Monetary Economics 55, 1238–1252.CrossRefGoogle Scholar
Kim, J. (2004) What determines aggregate returns to scale. Journal of Economic Dynamics and Control 28, 1577–1594.CrossRefGoogle Scholar
Laitner, J. and Stolyarov, D. (2004) Aggregate returns to scale and embodied technical change: Theory and measurement using stock market data. Journal of Monetary Economics 51, 191–233.CrossRefGoogle Scholar
Pavlov, O. and Weder, M. (2012) Variety matters. Journal of Economic Dynamics and Control 36, 629–641.CrossRefGoogle Scholar
Perli, R. (1998) Indeterminacy, home production, and the business cycle: A calibrated analysis. Journal of Monetary Economics 41, 105–125.CrossRefGoogle Scholar
Schmitt-Grohé, S. and Uribe, M. (1997) Balanced-budget rules, distortionary taxes and aggregate instability. Journal of Political Economy 105, 976–1000.CrossRefGoogle Scholar
Wen, Y. (1998) Capacity utilization under increasing returns to scale. Journal of Economic Theory 81, 7–36.CrossRefGoogle Scholar
Wen, Y. and Wu, J. (2019) Withstanding the Great Recession like China. Manchester School 87, 138–182.CrossRefGoogle Scholar