MONOPOLISTIC COMPETITION, TECHNOLOGY SHOCKS, AND AGGREGATE FLUCTUATIONS

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