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ENDOGENOUS FIRM ENTRY IN AN ESTIMATED MODEL OF THE U.S. BUSINESS CYCLE

Published online by Cambridge University Press:  23 June 2017

Sven Offick  and
Roland C. Winkler
Sven Offick
Affiliation:
Christian-Albrechts-University Kiel
Roland C. Winkler*
Affiliation:
TU Dortmund University
*
Address correspondence to: Roland C. Winkler, TU Dortmund University, Faculty of Business, Economics and Social Sciences, Vogelpothsweg 87, 44227 Dortmund, Germany; e-mail: roland.winkler@tu-dortmund.de.
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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 effect (CE) and the variety effect (VE). This paper tests the significance of this amplification mechanism, quantifies its importance, and disentangles the CE and VE. To this end, we estimate a medium-scale real business cycle model with firm entry for the U.S. economy. The CE and VE are estimated to be statistically significant. Together, they amplify the volatility of output by 8.5% relative to a model in which both effects are switched off. The CE accounts for most amplification, whereas the VE only plays a minor role.

Keywords

Competition EffectEntryMark-UpsVariety Effect
Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 1 , January 2019 , pp. 284 - 321
Copyright
Copyright © Cambridge University Press 2017 

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Footnotes

We thank for comments the editor, William A. Barnett, an associate editor, and two anonymous referees as well as Christian Bredemeier, Mathias Klein, Christopher Krause, Ludger Linnemann, Hans-Werner Wohltmann and seminar participants at Aarhus University, Kiel University, University Duisburg-Essen, the 8th Dynare Conference, the 17th Spring Meeting of Young Economists, the 2013 Annual Conference of the Royal Economic Society, the 67th European Meeting of the Econometric Society, the 2013 Annual Conference of the German Economic Society, and the 10th Euroasia Business and Economic Society Conference.

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