Summary
The standard neoclassical growth model is modified by introducing a market structure characterized by monopolistic competition and variable demand elasticities. In equilibrium, the price elasticity of the demand schedule facing a typical firm is a function of the aggregate savings rate. The latter feature results from an assumed wedge between the elasticity of substitution across goods in productive activities and that in consumption. In contrast with most examples in the literature our model does not require increasing returns (internal or external) in order to generate multiple equilibria.
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Thanks are due to Jess Benhabib, Duncan Foley, Oded Galor and participants in seminars at the Econometric Society Summer Meetings (Boston, 1993), NBER 1993 Summer Institute, CORE, UAB, and European University Institute for helpful comments.
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Gali, J. Multiple equilibria in a growth model with monopolistic competition. Econ Theory 8, 251–266 (1996). https://doi.org/10.1007/BF01211817
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DOI: https://doi.org/10.1007/BF01211817