EQUILIBRIUM INDETERMINACY, ENDOGENOUS ENTRY AND EXIT, AND INCREASING RETURNS TO SPECIALIZATION

This paper systematically examines the interrelations between equilibrium indeterminacy, endogenous entry and exit of intermediate-input firms, and increasing returns to specialization within two versions of a parsimonious one-sector monopolistically competitive real business cycle model. The technology for producing an intermediate good is postulated to display internal increasing returns-to-scale in our benchmark framework, whereas positive productive externalities are considered in the alternative setting. We analytically show that either formulation will exhibit belief-driven cyclical fluctuations if and only if the equilibrium wage-hours locus is positively sloped and steeper than the household's labor supply curve. We also find that ceteris paribus our alternative macroeconomy is more susceptible to indeterminacy and sunspots than the baseline counterpart.