Working Paper: NBER ID: w13646
Authors: Florin Bilbiie; Fabio Ghironi; Marc J. Melitz
Abstract: 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.
Keywords: No keywords provided
JEL Codes: E20; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Economic expansions (E32) | Higher entry rates (G19) |
| Higher entry rates (G19) | Producer entry (D20) |
| Stock market price of investment (G19) | Household saving decisions (D14) |
| Stock market price of investment (G19) | Producer entry (D20) |
| Stock market price of investment (G19) | Labor allocation across sectors (J29) |
| Sunk entry costs (D43) | Sluggish response of number of producers (E23) |
| Sluggish response of number of producers (E23) | Endogenous propagation mechanism for business cycle (E32) |
| Model predictions (C59) | Procyclical number of producers (E23) |
| Model predictions (C59) | Procyclical profits (E32) |
| Model predictions (C59) | Countercyclical markups (E32) |