Monopolistic competition, increasing returns to specialization and output persistence

Devereux et al. (Economics Letters, 1993, 41, 57-61) showed that introducing together imperfect competition and increasing returns to specialization into Real Business Cycle (RBC)-type models results in making output more persistent than the underlying technology shocks. We carry out a simple generalization of their model, which clearly disentangles the two features, and show that the added persistence is actually because of the increasing returns to specialization.