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Abstract

Recent literature has addressed how product creation amplifies economic fluctuations via the love of variety. Yet, the empirical evidence on variety effects is sparse. The current paper demonstrates that decreasing returns in the variety-level production technology, which leads to increasing marginal costs, similarly amplify business cycles. Product scope expansions reduce marginal costs and firms have an incentive to produce multiple products even if the variety effects are entirely absent. The efficiency gains from adjusting product scopes makes the economy more susceptible to sunspot equilibria. The indeterminate model is estimated via Bayesian methods and data favors the multi-product structure with animal spirits explaining a significant fraction of U.S. business cycles.

Item Type:	Article
Authors/Creators:	Pavlov, O
Keywords:	indeterminacy, sunspot equilibria, multi-product firms, business cycles, Bayesian estimation
Journal or Publication Title:	Journal of Economic Dynamics and Control
Publisher:	Elsevier Science Bv
ISSN:	0165-1889
DOI / ID Number:	https://doi.org/10.1016/j.jedc.2021.104239
Copyright Information:	© 2021 Elsevier B.V. All rights reserved.
Related URLs:	UTAS Profile: Pavlov, O
Item Statistics:	View statistics for this item

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