Working Paper: NBER ID: w4562
Authors: Satyajit Chatterjee; Russell W. Cooper
Abstract: We study the stochastic behavior of a dynamic general equilibrium model with monopolistic competition. Each seller sells his product in the consumption goods as well as the investment goods market and has market power in both. Consumers derive utility from a CES aggregate of all the consumption goods and augment their capital stock by a CES aggregate of all the investment goods. We analyze the equilibrium of this economy allowing for an endogenous determination of the number of firms and therefore of products. The principal effect we highlight is the endogenous propagation and magnification of technology and preference disturbances through product space variations.
Keywords: business cycles; product variety; monopolistic competition; firm entry and exit
JEL Codes: E32; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| entry and exit of firms (D21) | magnification and propagation of exogenous disturbances (F41) |
| number of firms increases (D21) | diversity of product space increases (F12) |
| diversity of product space increases (F12) | agents exert more effort and accumulate more capital (D29) |
| entry of firms (L26) | increased effort and accumulation by agents (D73) |
| increased effort and accumulation by agents (D73) | further entry of firms (L19) |
| variations in the number of firms (L19) | understanding job creation and destruction dynamics (J63) |