TY  - JOUR
AU  - Bilbiie,Florin
AU  - Ghironi,Fabio
AU  - Melitz,Marc J.
TI  - Endogenous Entry, Product Variety, and Business Cycles
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13646
PY  - 2007
Y2  - November 2007
UR  - http://www.nber.org/papers/w13646
L1  - http://www.nber.org/papers/w13646.pdf
N1  - Author contact info:
Florin Bilbiie
Finance and Economics Department
HEC Paris Business School
1 rue de la Lib�ration
78352 Jouy en Josas cedex
France
E-Mail: bilbiie@hec.fr

Fabio Ghironi
Boston College
Department of Economics
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3859
Tel: 617/552-3686
Fax: 617/552-2308
E-Mail: fabio.ghironi@bc.edu

Marc Melitz
Dept of Economics & Woodrow Wilson School
Princeton University
308 Fisher Hall
Princeton, NJ 08544
Tel: 609/258-5493
Fax: 609/258-1374
E-Mail: mmelitz@princeton.edu
AB  - This paper builds a framework for the analysis of macroeconomic fluctuations that incorporates the endogenous determination of the number of producers over the business cycle. Economic expansions induce higher entry rates by prospective entrants subject to irreversible investment costs. The sluggish response of the number of producers (due to the sunk entry costs) generates a new and potentially important endogenous propagation mechanism for real business cycle models. The stock-market price of investment (corresponding to the creation of new productive units) determines household saving decisions, producer entry, and the allocation of labor across sectors. The model performs at least as well as the benchmark real business cycle model with respect to the implied second-moment properties of key macroeconomic aggregates. In addition, our framework jointly predicts a procyclical number of producers and procyclical profits even for preference specifications that imply countercyclical markups. When we include physical capital, the model can reproduce the variance and autocorrelation of GDP found in the data.
ER  -