MONOPOLISTIC COMPETITION, TECHNOLOGY SHOCKS, AND AGGREGATE FLUCTUATIONS

We analyze a real business cycle (RBC) model in which aggregate produc tion exhibits increasing returns to specialization in conjunction with imperfect competition and free entry and exit of firms over the busin ess cycle. We show that the requirements of both high variance and hig h persistence in technology shocks that have been noted by critics of RBC theory may arise from the assumptions of perfect competition and c onstant returns to scale, rather than from the general proposition tha t real productivity shocks can significantly account for the business cycle.