Hostname: page-component-cd9895bd7-dk4vv Total loading time: 0 Render date: 2024-12-27T05:10:26.075Z Has data issue: false hasContentIssue false
  • English
  • Français

ENDOGENOUS FIRM ENTRY IN AN ESTIMATED MODEL OF THE U.S. BUSINESS CYCLE

Published online by Cambridge University Press:  23 June 2017

Sven Offick  and
Roland C. Winkler
Sven Offick
Affiliation:
Christian-Albrechts-University Kiel
Roland C. Winkler*
Affiliation:
TU Dortmund University
*
Address correspondence to: Roland C. Winkler, TU Dortmund University, Faculty of Business, Economics and Social Sciences, Vogelpothsweg 87, 44227 Dortmund, Germany; e-mail: roland.winkler@tu-dortmund.de.
Get access Rights & Permissions [Opens in a new window]

Abstract

A recent theoretical literature highlights the role of endogenous firm entry as an internal amplification mechanism of business cycle fluctuations. The amplification mechanism works through the competition effect (CE) and the variety effect (VE). This paper tests the significance of this amplification mechanism, quantifies its importance, and disentangles the CE and VE. To this end, we estimate a medium-scale real business cycle model with firm entry for the U.S. economy. The CE and VE are estimated to be statistically significant. Together, they amplify the volatility of output by 8.5% relative to a model in which both effects are switched off. The CE accounts for most amplification, whereas the VE only plays a minor role.

Keywords

Competition EffectEntryMark-UpsVariety Effect
Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 1 , January 2019 , pp. 284 - 321
Copyright
Copyright © Cambridge University Press 2017 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank for comments the editor, William A. Barnett, an associate editor, and two anonymous referees as well as Christian Bredemeier, Mathias Klein, Christopher Krause, Ludger Linnemann, Hans-Werner Wohltmann and seminar participants at Aarhus University, Kiel University, University Duisburg-Essen, the 8th Dynare Conference, the 17th Spring Meeting of Young Economists, the 2013 Annual Conference of the Royal Economic Society, the 67th European Meeting of the Econometric Society, the 2013 Annual Conference of the German Economic Society, and the 10th Euroasia Business and Economic Society Conference.

References

REFERENCES

An, Sungbae and Frank Schorfheide (2007) Bayesian analysis of DSGE models. Econometric Reviews 26, 113–172.Google Scholar
Barseghyan, Levon and Riccardo DiCecio (2011) Entry costs, industry structure, and cross-country income and TFP differences. Journal of Economic Theory 146, 1828–1851.Google Scholar
Benassy, Jean-Pascal (1996) Taste for variety and optimum production patterns in monopolistic competition. Economics Letters 52, 41–47.Google Scholar
Bergin, Paul R. and Giancarlo Corsetti (2008) The extensive margin and monetary policy. Journal of Monetary Economics 55, 1222–1237.Google Scholar
Bernard, Andrew B., Redding, Stephen J. and Schott, Peter K. (2010) Multi-product firms and product switching. American Economic Review 100, 70–97.Google Scholar
Bilbiie, Florin, Ghironi, Fabio and Melitz, Marc J. (2012) Endogenous entry, product variety, and business cycles. Journal of Political Economy 120, 304–345.Google Scholar
Bils, Mark (1987) The cyclical behavior of marginal cost and price. American Economic Review 77, 838–855.Google Scholar
Boivin, Jean and Giannoni, Marc (2006) DSGE Models in a Data-Rich Environment. NBER technical working papers 0332, National Bureau of Economic Research.Google Scholar
Broda, Christian and Weinstein, David E. (2010) Product creation and destruction: Evidence and price implications. American Economic Review 100, 691–723.Google Scholar
Cardi, Olivier and Restout, Romain (2015) Fiscal shocks in a two-sector open economy with endogenous markups. Macroeconomic Dynamics 19, 1839–1865.Google Scholar
Chatterjee, Satyajit and Cooper, Russell W. (2014) Entry and exit, product variety, and the business cycle. Economic Inquiry 52, 1466–1484.Google Scholar
Christiano, Lawrence J., Eichenbaum, Martin and Evans, Charles L. (2005) Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy 113 (1), 1–45.Google Scholar
Chugh, Sanjay K. and Ghironi, Fabio (2015) Optimal Fiscal Policy with Endogenous Product Variety. CEPR discussion papers 10674, C.E.P.R.Google Scholar
Colciago, Andrea and Etro, Federico (2010) Real business cycles with Cournot competition and endogenous entry. Journal of Macroeconomics 32, 1101–1117.Google Scholar
Colciago, Andrea and Rossi, Lorenza (2015) Firm dynamics, endogenous markups, and the labor share of income. Macroeconomic Dynamics 19, 1309–1331.Google Scholar
Davis, Steven, Haltiwanger, John C. and Schuh, Scott (1998) Job Creation and Destruction. Cambridge, MA: The MIT Press.Google Scholar
Devereux, Michael B., Head, Allen C. and Lapham, Beverly J. (1996) Aggregate fluctuations with increasing return to specialization and scale. Journal of Economic Dynamics and Control 20, 627–656.Google Scholar
Etro, Federico and Colcagio, Andrea (2010) Endogenous market structures and the business cycle. Economic Journal 120, 1201–1233.Google Scholar
Feenstra, Robert C. (2003) A homothetic utility function for monopolistic competition models, without constant price elasticity. Economics Letters 78, 79–86.Google Scholar
Gali, Jordi, Smets, Frank and Wouters, Raf (2012) Unemployment in an estimated New Keynesian model. NBER Macroeconomics Annual 2011, 329–360.Google Scholar
Ghironi, Fabio and Melitz, Marc J. (2005) International trade and macroeconomic dynamics with heterogeneous firms. Quarterly Journal of Economics 120, 865–915.Google Scholar
Greenwood, Jeremy, Hercowitz, Zvi and Huffman, Gregory (1988) Investment, capacity utilization, and the real business cycle. American Economic Review 78, 402–417.Google Scholar
Jaimovich, Nir and Floetotto, Max (2008) Firm dynamics, mark-up variations, and the business cycle. Journal of Monetary Economics 55, 1238–1252.Google Scholar
Jaimovich, Nir and Rebelo, Sergio (2009) Can news about the future drive the business cycle? American Economic Review 99, 1097–1118.Google Scholar
Justiniano, Alejandro, Primiceri, Giorgo and Tambalotti, Andrea (2010) Investment shocks and business cycles. Journal of Monetary Economics 57, 132–145.Google Scholar
Justiniano, Alejandro, Primiceri, Giorgo and Tambalotti, Andrea (2013) Is there a trade-off between inflation and output stabilization? American Economic Journal: Macroeconomics 5, 1–31.Google Scholar
King, Robert, Plosser, Charles and Rebelo, Sergio (1988) Production, growth and business cycles: I. The basic neoclassical model. Journal of Monetary Economics 21, 195–232.Google Scholar
Lewis, Vivien (2009) Business cycle evidence on firm entry. Macroeconomic Dynamics 13, 605–624.Google Scholar
Lewis, Vivien and Poilly, Céline (2012) Firm entry, mark-ups, and the monetary transmission mechanism. Journal of Monetary Economics 59, 670–685.Google Scholar
Lewis, Vivien and Stevens, Arnoud (2015) Entry and mark-up dynamics in an estimated business cycle model. European Economic Review 74, 14–35.Google Scholar
Lewis, Vivien and Winkler, Roland (2015) Fiscal policy and business formation in open economies. Research in Economics 69, 603–620.Google Scholar
Lewis, Vivien and Winkler, Roland (in press) Government spending, entry and the consumption crowding-in puzzle. International Economic Review.Google Scholar
Mazumder, Sandeep (2014) The price-marginal cost markup and its determinants in U.S. manufacturing. Macroeconomic Dynamics 18, 783–811.Google Scholar
Nekarda, Christopher J. and Ramey, Valerie A. (2013) The Cyclical Behavior of the Price-Cost Markup. NBER working paper 19099, National Bureau of Economic Research.Google Scholar
Rotemberg, Julio J. and Woodford, Michael (1999) The cyclical behavior of prices and costs. In Taylor, J. B. and Woodford, M. (eds.), Handbook of Macroeconomics, vol. 1, pp. 1051–1135. Amsterdam: Elsevier.Google Scholar
Schmitt-Grohé, Stephanie and Uribe, Martín (2012) What's news in business cycles. Econometrica 80, 2733–2764.Google Scholar
Smets, Frank and Wouters, Raf (2007) Shocks and frictions in U.S. business cycles: A Bayesian DSGE approach. American Economic Review 97, 586–606.Google Scholar