The competition effect in business cycles

Vivien Lewis and Arnoud Stevens

No 51, IMFS Working Paper Series from Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS)

Abstract: How do changes in market structure affect the US business cycle? We estimate a monetary DSGE model with endogenous rm/product entry and a translog expenditure function by Bayesian methods. The dynamics of net business formation allow us to identify the 'competition effect', by which desired price markups and inflation decrease when entry rises. We find that a 1 percent increase in the number of competitors lowers desired markups by 0.18 percent. Most of the cyclical variability in inflation is driven by markup fluctuations due to sticky prices or exogenous shocks rather than endogenous changes in desired markups.

Keywords: Bayesian estimation; business cycles; competition; entry; markups (search for similar items in EconPapers)
JEL-codes: C11 E23 E32 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:imfswp:51

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