MACROECONOMICS WITH INCREASING RETURNS TO SCALE

We develop a macromodel in which each firm produces with increasing returns to scale but imperfect information of customers ensures a market outcome with many price setting firms. We analyze how this economy responds to variations of fiscal and monetary policy and different types of productivity shifts. This model offers a simple explanation for some stylized facts of business cycles: long-run ineffectiveness of fiscal and monetary policy, procyclicality of total factor productivity, countercyclicality of price mark-ups on marginal cost, and - to a specific extent - countercyclicality of (detrended) prices.