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Endogenous firm entry in an estimated model of the U.S. business cycle

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  • Offick, Sven
  • Winkler, Roland C.

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 and the variety effect. This paper tests the significance of this amplification mechanism, quantifies its importance, and disentangles the competition and the variety effect. To this end, we estimate a medium-scale real business cycle model with firm entry for the U.S. economy. The competition and the variety effect are estimated to be statistically significant. Together, they amplify the volatility of output by 8.5 percent relative to a model in which both effects are switched off. The competition effect accounts for most amplification, whereas the variety effect only plays a minor role.

Suggested Citation

  • Offick, Sven & Winkler, Roland C., 2015. "Endogenous firm entry in an estimated model of the U.S. business cycle," Economics Working Papers 2015-06, Christian-Albrechts-University of Kiel, Department of Economics.
    • Handle: RePEc:zbw:cauewp:201506
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    References listed on IDEAS

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    Cited by:

    1. Fabio Ghironi & Sanjay K. Chugh, 2010. "Optimal Fiscal Policy with Endogenous Product Variety," 2010 Meeting Papers 812, Society for Economic Dynamics.
    2. Röhe, Oke & Stähler, Nikolai, 2020. "Demographics and the decline in firm entry: Lessons from a life-cycle model," Discussion Papers 15/2020, Deutsche Bundesbank.
    3. Lenno Uuskula, 2015. "Firm turnover and inflation dynamics," Bank of Estonia Working Papers wp2015-01, Bank of Estonia, revised 03 Feb 2015.

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    More about this item

    Keywords

    Bayesian estimation; Business Cycles; Competition Effect; Entry; Mark-ups; Variety Effect;
    All these keywords.

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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