Imperfect competition and indeterminacy of aggregate output

This paper shows imperfect competition can lead to indeterminacy in aggregate output in a standard DSGE model with imperfect competition. Indeterminacy arises in the model from the composition of aggregate output. In sharp contrast to the indeterminacy literature pioneered by Benhabib and Farmer [3] and Gali [19], indeterminacy in our model is global; hence it is more robust to structural parameters. In addition, sunspots in our model can be autocorrelated. The paper provides a justi…cation for exogenous variations in desired markups, which play an important role as a source of cost-push shocks in the monetary policy literature. Our model outperforms a standard RBC model driven by technology shocks in several dimensions, including the volatility of labor market and the hump-shaped output dynamics. Keywords: Indeterminacy, Global Sunspots, Self-ful…lling Expectations, Procyclical Productivity, Marginal Costs, Counter-Cyclical Markup, Cost-Push Shocks, Hump-Shaped Impulse Responses. JEL codes: E31, E32. We thank Jordi Gali and an anonymous referee for very helpful comments, which have improved the quality of the paper signi…cantly. John McAdams and Luke Shimek provided able research assistance. The usual disclaimer applies. Correspondence: Yi Wen, Research Department, Federal Reserve Bank of St. Louis, St. Louis, MO, 63144. Phone: 314-444-8559. Fax: 314-444-8731. Email: [email protected].