Endogenous, imperfectly competitive business cycles

We investigate how imperfect competition affects the occurrence and the pro perties of endogenous, rational expectations business cycles in an overlapp ing generations model with constant returns to scale in production. The mod el has explicit product and labor markets all characterized by monopolistic competition. An implicit assumption of barriers to entry justifies that th e number of firms is fixed even when positive profits occur. It turns out t hat both market power of firms on the product markets and market power of u nions on the labor markets make the occurrence of cycles more likely. In pa rticular, imperfect competition on the product markets and the positive pro fits associated with it may have the effect that there is a cycle even if t he labor supply curve is increasing in the real-wage rate. For competitive cycles is required not only a decreasing labor supply curve, but a wage ela sticity below - 1/2 (at stationary equilibrium). Market power on the labor markets may have the effect that imperfectly competitive cycles are in acco rdance with certain empirical regularities (some well known, some reported in the paper) concerning fluctuations in output and involuntary unemploymen t. Since involuntary unemployment does not occur under perfect competition such regularities are incompatible with competitive cycles. (C) 2000 Elsevi er Science B.V. All rights reserved. JEL classification: E10; E32.