ON ENDOGENOUS BUSINESS CYCLES UNDER INCREASING RETURNS TO VARIETY AND SECTOR‐SPECIFIC EXTERNALITY

Juin-jen Chang, Jang-Ting Guo and Wei‐Neng Wang

Economic Inquiry, 2021, vol. 59, issue 1, 532-548

Abstract: We examine the theoretical as well as quantitative interrelations between endogenous business cycles, increasing returns to product variety and sector‐specific productive externalities within a two‐sector real business cycle model. In a calibrated version of our benchmark closed‐economy setting, the threshold level of investment externalities needed for equilibrium indeterminacy is found to be monotonically increasing in the degree of market competitiveness. We also study the model's local stability properties (i) when the parameters that govern the level of intermediate‐good producers' market power and the strength of variety effects are disentangled; and (ii) in the context of a small open economy. (JEL E30, E32, O41)

Date: 2021
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