The Cyclical Behavior Of Wages And Profits Under Imperfect Competition

We build a simple dynamic model of the business cycle with monopolistically competitive firms. With simple assumptions concerning firm entry and exit, the model can explain some important stylized facts of the business cycle which standard real business cycle models with perfect competition cannot predict. These include the cyclical behavior of the shares of capital and labor income in total income, the volatilities of these shares, and the pattern of net firm creation. These predictions are robust to whether the principle source of the business cycle is aggregate supply shocks or aggregate demand shocks.