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EQUILIBRIUM INDETERMINACY, ENDOGENOUS ENTRY AND EXIT, AND INCREASING RETURNS TO SPECIALIZATION

Published online by Cambridge University Press:  26 February 2021

Shu-Hua Chen  and
Jang-Ting Guo
Shu-Hua Chen
Affiliation:
National Taipei University
Jang-Ting Guo*
Affiliation:
University of California, Riverside
*
Address correspondence to: Jang-Ting Guo, Department of Economics, University of California, Riverside, Riverside, CA92521, USA. e-mail: guojt@ucr.edu. Phone: 1-951-827-1588. Fax: 1-951-827-5685.
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Abstract

This paper systematically examines the interrelations between equilibrium indeterminacy, endogenous entry and exit of intermediate input firms, and increasing returns to specialization within two versions of a parsimonious one-sector monopolistically competitive RBC model. The technology for producing an intermediate good is postulated to display internal increasing returns to scale in our benchmark framework, whereas positive productive externalities are considered in the alternative setting. We analytically show that either formulation will exhibit belief-driven cyclical fluctuations provided the equilibrium wage-hours locus is positively sloped and steeper than the household’s labor supply curve. We also find that ceteris paribus our alternative macroeconomy is more susceptible to indeterminacy and sunspots than the baseline counterpart.

Keywords

Equilibrium IndeterminacyEndogenous Entry and ExitIncreasing Returns to Specialization
Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 7 , October 2022 , pp. 1756 - 1774
Copyright
© Cambridge University Press 2021

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Footnotes

We thank two anonymous referees, William Barnett (Editor), Roger Farmer (Co-Editor), Juin-Jen Chang, Been-Lon Chen, Miroslav Gabrovski, Sharon Harrison, Victor Ortego-Marti, Wei-Neng Wang, and Mark Weder for helpful comments and discussions. Part of this research was conducted while Guo was a visiting research fellow of economics at Academia Sinica, Taipei, Taiwan, whose hospitality is greatly appreciated. Of course, all remaining errors are our own.

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