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Self-Fulfilling Prophecies, Demand-Composition Effects and Economic Fluctuations
Journal of Contextual Economics – Schmollers Jahrbuch, Vol. 119 (1999), Iss. 4 : pp. 509–529
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Weder, Mark
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Abstract
This paper develops a dynamic general equilibrium model of monopolistic competition with entry and exit. It is shown that the model displays indeterminacy at modest degrees of increasing returns in cases when the market power in the consumption goods market and in the investment goods market is asymmetric. Furthermore, the model is successful in replicating major business cycle facts. In contrast to most existing Real Business Cycle models, the animal spirits model contains a strong endogenous propagation mechanism.