Journal of Economic Theory · 1994 · 256 citations · 0 references
Social SciencesBusiness EconomicsEconomicsEconometricsMacroeconomicsMicroeconomicsAggregate DemandBusiness CyclesDynamic Economic ModelsGeneral EquilibriumGeneral Equilibrium TheoryMonopolistic CompetitionAggregate Demand AnalysisAggregate Demand CurveAggregate Demand ModelingBusiness Cycle DynamicsEconometric IdentificationEquilibrium With Nominal RigiditiesMonopolistic Competition ModelsRevisions
The paper develops a dynamic general equilibrium model with monopolistically competitive firms and endogenous markups to show that self‑fulfilling expectation revisions can generate persistent equilibrium fluctuations. The model links markups to the composition of aggregate demand, employing a dynamic general equilibrium framework with monopolistically competitive firms and incorporating econometric evidence on this relationship. The model produces business‑cycle‑like fluctuations without requiring increasing returns or nominal rigidities, and the authors report econometric evidence supporting the markup‑demand link. The article is classified under JEL codes D43, D58, and E32.
We develop a dynamic general equilibrium model with monopolistically competitive firms and endogenous markups and show the possibility of equilibria with persistent fluctuations driven by self-fulfilling revisions of expectations. For some parameter values such fluctuations are characterized by time series properties similar to those observed in U.S. postwar business cycles. In contrast with the existing literature our results do not rely on the presence of increasing returns or nominal rigidities. A key ingredient of the model is the link between markups and the composition of aggregate demand. Some econometric evidence on the latter is also reported. Journal of Economic Literature Classification Number: D43, D58, E32.