THE CYCLICAL BEHAVIOR OF WAGES AND PROFITS UNDER IMPERFECT COMPETITION

We build a dynamic model of the business cycle with monopolistically c ompetitive firms. With simple assumptions concerning firm entry and ex it, the model can explain some stylized facts of the business cycle th at standard real business cycle models cannot predict. They include th e cyclical behaviour of the shares of capital and labour income in tot al income and the pattern of net firm creation. These predictions are robust to whether the main source of the business cycle is aggregate s upply-shocks or aggregate demand shocks. JEL classification E32, E62.