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Entry Dynamics, Demand Shocks and Induced Productivity Fluctuations

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Abstract

This paper analyses a small open economy Ramsey model with an endogenous labor supply and no capital. The number of firms is subject to adjustment costs, so that the entry dynamics is determined endogenously. We find that with imperfect competition, there is a first order effect of a demand shock which is absent in the Walrasian equivalent. We solve and analyse the dynamic model for permanent and temporary demand shocks.

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