Imperfect competition and indeterminacy of aggregate output
Pengfei Wang () and
Yi Wen ()
No 2006-017, Working Papers from Federal Reserve Bank of St. Louis
This paper shows imperfect competition can lead to indeterminacy in aggregate output in a standard DSGE model with imperfect competition. Indeterminacy arises in the model from the composition of aggregate output. In sharp contrast to the indeterminacy literature pioneered by Benhabib and Farmer  and Gali , indeterminacy in our model is global; hence it is more robust to structural parameters. In addition, sunspots in our model can be autocorrelated. The paper provides a justification for exogenous variations in desired markups, which play an important role as a source of cost-push shocks in the monetary policy literature. Our model outperforms a standard RBC model driven by technology shocks in several dimensions, including the volatility of labor market and the hump-shaped output dynamics.
Keywords: Prices; Business cycles (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-dge, nep-mac and nep-upt
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Journal Article: Imperfect competition and indeterminacy of aggregate output (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:2006-017
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