Business Cycles with Free Entry Ruled by Animal Spirits

25 Pages Posted: 25 Jul 2003

See all articles by Rodolphe dos Santos Ferreira

Rodolphe dos Santos Ferreira

University of Angers - Bureau of Economic Theory and Application (BETA)

Teresa Lloyd-Braga

Catolica Lisbon School of Business and Economics; Catolica Lisbon School of Business and Economics

Date Written: June 2003

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

JEL Classification: D43, E32, L10

Suggested Citation

dos Santos Ferreira, Rodolphe and Lloyd-Braga, Teresa, Business Cycles with Free Entry Ruled by Animal Spirits (June 2003). Available at SSRN: https://ssrn.com/abstract=428544

Rodolphe Dos Santos Ferreira

University of Angers - Bureau of Economic Theory and Application (BETA) ( email )

61, avenue de la Foret Noire
Strasbourg, 67000
France
+33 03 9024 2073 (Phone)
+33 03 9024 2071 (Fax)

Teresa Lloyd-Braga (Contact Author)

Catolica Lisbon School of Business and Economics ( email )

Palma de Cima
Lisboa, Lisboa 1649-023
Portugal
+351 21 721 4263 (Phone)
+351 21 727 0252 (Fax)

Catolica Lisbon School of Business and Economics ( email )

Palma de Cima
Lisboa, Lisboa 1649-023
Portugal