Perfectly competitive models of endogenous business fluctuations

Abstract

The endogenous hypothesis is not new. At a pre-analytic level it is based on the simple intuition that market mechanisms are inherently dynamically unstable, at least around their stationary positions. In this note, I want to stress the theoretical point that there is nothing in the working of a perfectly competitive market system that prevents it from displaying persistent and endogenous fluctuations and that, moreover, such fluctuations may have their origins in market fundamentals such as factor intensities, factor substitutability, degree of impatience, and so forth. Nevertheless, macroeconomic models of endogenous fluctuations still have to prove that, apart from being very beautiful, they can also be useful to understand the so-called heal world’: hit sunt leones. This article is not intended to be a survey of all that has been written in this area in the last decade. I have no title whatsoever to talk about empirical studies: Chera Sayers’ contribution in this same volume addresses that guestion. Scheinkman (1990) is a readily available survey of nonlinear statistical methods that are relevant to this debate. As for the theory, incompetence recommends that I avoid touching on sunspot equilibria OLG models and, more generally, expectations driven cycles: They are instead discussed in Jean Michel Grandmont’s article. Finally, marketing awareness implies recommending Boldrin and Woodford (1990) as a reasonably complete survey of what the endogenous cycle research program has recently produced at a theoretical level.