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Entry and markup dynamics in an estimated business cycle model

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  • Lewis, Vivien
  • Stevens, Arnoud

Abstract

How do changes in market structure affect the US business cycle? We estimate a monetary DSGE model with endogenous firm/product entry and a translog expenditure function by Bayesian methods. The dynamics of net business formation allow us to identify the extent to which desired price markups and inflation decrease when entry rises. We find that a 1% increase in the number of competitors lowers desired markups by 0.17%. While markup fluctuations due to sticky prices or exogenous shocks account for a large proportion of US inflation variability, endogenous changes in desired markups also play a non-negligible role.

Suggested Citation

  • Lewis, Vivien & Stevens, Arnoud, 2015. "Entry and markup dynamics in an estimated business cycle model," European Economic Review, Elsevier, vol. 74(C), pages 14-35.
    • Handle: RePEc:eee:eecrev:v:74:y:2015:i:c:p:14-35
    DOI: 10.1016/j.euroecorev.2014.11.005
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    More about this item

    Keywords

    Bayesian estimation; Business cycles; Competition; Entry; Markups;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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