Jang-Ting Guo | University of California, Riverside (original) (raw)

Papers by Jang-Ting Guo

Journal of Development Economics

Recent empirical studies have documented that the incidence of …rms'tax evasion on their sales is... more Recent empirical studies have documented that the incidence of …rms'tax evasion on their sales is negatively correlated with the country's level of …nancial development. Our analysis shows that this stylized fact can be theoretically accounted for within a smallopen-economy model of optimal tax enforcement under asymmetric information in credit markets. In an economy with a more developed …nancial sector that exhibits smaller agency costs, we …nd that the government will raise its optimal probability of tax auditing, which in turn leads to more tax compliance. It follows that …nancial development and tax evasion are inversely related, as observed in the actual data.

Working paper (Federal Reserve Bank of Cleveland)

Journal of Monetary Economics, 2015

We show that a one-sector real business cycle model with variable capital utilization and mild in... more We show that a one-sector real business cycle model with variable capital utilization and mild increasing returns-to-scale is able to generate qualitatively as well as quantitatively realistic aggregate ‡uctuations driven by news shocks to future consumption demand. In sharp contrast to many studies in the existing expectations-driven business cycle literature, our results do not rely on non-separable preferences or investment adjustment costs.

Macroeconomic Dynamics, 2002

This paper examines the quantitative implications of government fiscal policy in a discrete-time ... more This paper examines the quantitative implications of government fiscal policy in a discrete-time one-sector growth model with a productive externality that generates social increasing returns to scale. Starting from a laissez-faire economy that exhibits local indeterminacy, we show that the introduction of a constant capital tax or subsidy can lead to various forms of endogenous fluctuations, including stable 2-, 4-, 8-, and 10-cycles, quasiperiodic orbits, and chaos. In contrast, a constant labor tax or subsidy has no effect on the qualitative nature of the model's dynamics. We show that the use of local steady-state analysis to detect the presence of multiple equilibria in this class of models can be misleading. For a plausible range of capital tax rates, the log-linearized dynamical system exhibits saddle-point stability, suggesting a unique equilibrium, whereas the true nonlinear model exhibits global indeterminacy. This result implies that stabilization policies designed to...

Journal of Economic Theory, 2004

It has been shown that under perfect competition and constant returns-to-scale, a onesector real ... more It has been shown that under perfect competition and constant returns-to-scale, a onesector real business cycle model may exhibit indeterminacy and sunspots when income tax rates are determined by a balanced-budget rule with a pre-set level of government expenditures. This paper shows that indeterminacy disappears if the government finances endogenous public spending and transfers with fixed income tax rates. Under this type of balanced-budget formulation, the economy exhibits saddle-path stability and equilibrium uniqueness, regardless of the source of government revenue and/or the existence of lumpsum transfers.

European Economic Review, 2006

International Journal of Economic Theory

Previous research has shown that in the context of a prototypical New Keynesian model, more progr... more Previous research has shown that in the context of a prototypical New Keynesian model, more progressive income taxation may lead to higher volatilities of hours worked and total output in response to a monetary disturbance. We analytically show that this business-cycle destabilization result is overturned within an otherwise identical macroeconomy subject to impulses to the household's utility formulation. Under a continuously or linearly progressive fiscal policy rule, an increase in the tax progressivity will always raise the degree of equilibrium nominal-wage rigidity, and thus serve as an automatic stabilizer that mitigates cyclical fluctuations driven by preference shocks. Our analysis illustrates that whether a more progressive tax schedule (de)stabilizes the business cycle depends crucially on the underlying driving source.

We show that a one-sector real business cycle model with mild increasing returns-to-scale, variab... more We show that a one-sector real business cycle model with mild increasing returns-to-scale, variable capital utilization and saddle-path stability is able to produce qualitatively realistic business cycles driven solely by disturbances to government purchases. Due to an endogenous increase in labor productivity, a positive spending shock can lead to simul-taneous increases in output, consumption, investment, employment and real wage. Our analysis illustrates a close relationship between this result and the recent literature that explores indeterminacy and sunspots in real business cycle models under laissez-faire. In particular, the condition which governs the required magnitude of increasing returns for government spending shocks to generate procyclical macroeconomic effects is identical to that necessary for a laissez-faire one-sector real business cycle model to exhibit local inde-terminacy.

We examine the theoretical interrelations between equilibrium (in)determinacy and economic growth... more We examine the theoretical interrelations between equilibrium (in)determinacy and economic growth in a one-sector representative-agent model of endogenous growth with progressive taxation of income and productive flow of public spending. We analytically show that if the demand-side effect of government purchases is weaker, the economy exhibits an indeterminate balanced-growth equilibrium and belief-driven growth fluctuations when the tax schedule is suffi ciently progressive or regressive. If the supply-side effect of public expenditures is weaker, indeterminacy and sunspots arise under progressive income taxation. In sharp contrast to traditional Keynesian-type stabilization policies, our analysis finds that raising the tax progressivity may destabilize an endogenously growing economy with fluctuations driven by agents’self-fulfilling expectations.

This paper examines the socially optimal (first-best) fiscal policy in a stochastic, infinite-hor... more This paper examines the socially optimal (first-best) fiscal policy in a stochastic, infinite-horizon representative agent model that exhibits consumption-enhanced as well as wealth-enhanced social status in the household utility. We show that the optimal labor tax rate is a positive constant that is used to correct negative consumption externalities. The optimal capital tax rate is also positive in order to overturn agents ’ status-seeking capital over-accumulation. Moreover, we find that in contrast to a conventional automatic stabilizer, the optimal capital tax moves in the opposite direction with shocks to firms’production technology. This result turns out to be qualitatively consistent with the discernible empirical evidence that many countries have implemented procyclical fiscal policies.

Standard dynamic small open economy models have predicted a counterfactual perfectly positive cor... more Standard dynamic small open economy models have predicted a counterfactual perfectly positive correlation between output and hours worked over the business cycle. In addi-tion, this class of models exhibits a weak internal propagation mechanism. To address these anomalies, this paper incorporates intertemporally non-separable labor supply and variable capital utilization into the canonical Mendoza model with adjustment costs of net investment. Our analysis shows that a dynamic, technology-shock driven small open econ-omy model with internal habit formation in labor hours and endogenous capital utilization is able to account for the main real business cycle regularities of Canada after 1981.

This paper systematically examines the interrelations between a progressive income tax schedule a... more This paper systematically examines the interrelations between a progressive income tax schedule and macroeconomic (in)stability in an otherwise standard one-sector real business model with productive government spending. We analytically show that the economy exhibits indeterminacy and sunspots only if the equilibrium wage-hours locus is positively sloped and steeper than the household's labor supply curve. Unlike in the framework with useless public expenditures, a less progressive tax policy may operate like an automatic stabilizer that mitigates belief-driven cyclical ‡uctuations. Our quantitative analysis shows that this result is able to provide a theoretically plausible explanation for the discernible reduction in U.S. output volatility after the Tax Reform Act of 1986 was implemented.

Standard dynamic small open economy models have predicted a counterfactual perfectly positive cor... more Standard dynamic small open economy models have predicted a counterfactual perfectly positive correlation between output and hours worked over the business cycle. In addition, this class of models exhibits a weak internal propagation mechanism. To address these anomalies, this paper incorporates intertemporally non-separable labor supply and variable capital utilization into the canonical Mendoza model with adjustment costs of net investment. Our analysis shows that a dynamic, technology-shock driven small open economy model with internal habit formation in labor hours and endogenous capital utilization is able to account for the main real business-cycle regularities of Canada after 1981.

Annals of Economics and Finance, 2009

We develop a one-sector endogenous growth model in which renewable natural resources are both a f... more We develop a one-sector endogenous growth model in which renewable natural resources are both a factor of production and measure of environmental quality. Along the balanced growth path, sustained economic growth and a non-deteriorating environment are shown to coexist. Moreover, steady-state economic growth and natural-resource utilization are positively related. Empirically, a cross-country growth regression that includes a broad measure of productive natural resources ia the Ecological Footprint ia provides strong support. Our estimation results also suggest conservation costs are minimal, and growth strategies based on greater physical capital formation and trade openness outperform those relying on more intensive utilization of the environment.

Previous research has shown that in the context of a prototypical New Keynesian model, more progr... more Previous research has shown that in the context of a prototypical New Keynesian model, more progressive income taxation may lead to higher volatilities of hours worked and total output in response to a monetary disturbance. We analytically show that this business-cycle destabilization result is overturned within an otherwise identical macroeconomy subject to impulses to the household's utility formulation. Under a continuously or linearly progressive fiscal policy rule, an increase in the tax progressivity will always raise the degree of equilibrium nominal-wage rigidity, and thus serve as an automatic stabilizer that mitigates cyclical fluctuations driven by preference shocks. Our analysis illustrates that whether a more progressive tax schedule (de)stabilizes the business cycle depends crucially on the underlying driving source.

This paper systematically examines the theoretical as well as quantitative interrelations between... more This paper systematically examines the theoretical as well as quantitative interrelations between government spending and disposable-income inequality in a tractable monopolistically competitive Ramsey macroeconomy. Upon a higher government size, we analytically show that whether the long-run after-tax Gini coeffi cient rises or falls depends on the sign and magnitude of the wealth inequality effect versus those of the adjusted-labor effect. Under (i) a mild level of productive public expenditures and (ii) a suffi ciently high intertemporal elasticity of consumption substitution, our calibrated model is able to generate qualitatively as well as quantitatively consistent income-inequality effects of government spending vis-à-vis recent estimation results.

Computing in Economics and Finance, 1999

Multiple-equilibria macroeconomic models suggest that consumers' and investors' perceptio... more Multiple-equilibria macroeconomic models suggest that consumers' and investors' perceptions about the state of the economy may be an important independent factor for business cycles. In this paper, we verify empirically the interrelations between waves of optimism and pessimism and subsequent economic fluctuations. We focus on the nonlinear behavior of non-fundamental movements in consumer sentiment, as a proxy for consumer's sunspots, and in business formation, representing animal spirits, around economic turning points. We find that bearish consumers and entrepreneurs are present before the onset of some U.S. economic downturns, even when the fundamentals are all very strong. In particular, our analysis suggests that waves of pessimism may have played a nontrivial role for the 1969-70 recession and slowdown, the 1981-82 recession, and the 1984-87 slowdown. The results are robust to a range of alternative linear and nonlinear specifications. Our evidence provides empiri...

This paper examines the theoretical as well as quantitative interrelations between equilibrium in... more This paper examines the theoretical as well as quantitative interrelations between equilibrium indeterminacy, increasing returns to product variety and sector-speci…c productive externalities within a two-sector real business cycle model. We analytically derive the necessary and su¢ cient condition under which the model exhibits an indeterminate steady state. In a calibrated version of our model economy, the threshold level of investment externalities that leads to belief-driven cyclical ‡uctuations is shown to be monotonically increasing with respect to the degree of market competitiveness. We also show that compared to three previous studies, our two-sector macroeconomy requires the lowest, and therefore the most empirically plausible, magnitude of productive externalities to generate endogenous business cycles. Keywords: Indeterminacy, Increasing Returns to Variety, Sector-Speci…c Externalities. JEL Classi…cation: E30, E32, O41. We would like to thank Been-Lon Chen, Shu-Hua Chen,...

In the context of a prototypical New Keynesian model, this paper examines the theoretical interre... more In the context of a prototypical New Keynesian model, this paper examines the theoretical interrelations between two tractable formulations of progressive taxation on labor income versus (i) the equilibrium degree of nominal wage rigidity as well as (ii) the resulting volatilities of hours worked and output in response to a monetary shock. In sharp contrast to the traditional stabilization view, we analytically show that linearly progressive taxation always operates like an automatic destabilizer which leads to higher cyclical ‡uctuations within the macroeconomy. We also obtain the same business cycle destabilization result under continuously progressive taxation if the initial degree of tax progressivity is su¢ cient low. Keywords: Progressive Taxation, Nominal Wage Rigidity, Automatic Stabilizer, Business Cycles. JEL Classi…cation: E12, E32, E62, We thank Nicolas Caramp, Juin-Jen Chang, Yi Mao, Victor Ortego-Marti, Chong-Kee Yip, and seminar participants at Academia Sinica and Chi...

This paper systematically examines the interrelations between equilibrium indeterminacy, endogeno... more This paper systematically examines the interrelations between equilibrium indeterminacy, endogenous entry and exit of intermediate-input firms, and increasing returns to specialization within two versions of a parsimonious one-sector monopolistically competitive real business cycle model. The technology for producing an intermediate good is postulated to display internal increasing returns-to-scale in our benchmark framework, whereas positive productive externalities are considered in the alternative setting. We analytically show that either formulation will exhibit belief-driven cyclical fluctuations if and only if the equilibrium wage-hours locus is positively sloped and steeper than the household's labor supply curve. We also find that ceteris paribus our alternative macroeconomy is more susceptible to indeterminacy and sunspots than the baseline counterpart.

Journal of Development Economics

Recent empirical studies have documented that the incidence of …rms'tax evasion on their sales is... more Recent empirical studies have documented that the incidence of …rms'tax evasion on their sales is negatively correlated with the country's level of …nancial development. Our analysis shows that this stylized fact can be theoretically accounted for within a smallopen-economy model of optimal tax enforcement under asymmetric information in credit markets. In an economy with a more developed …nancial sector that exhibits smaller agency costs, we …nd that the government will raise its optimal probability of tax auditing, which in turn leads to more tax compliance. It follows that …nancial development and tax evasion are inversely related, as observed in the actual data.

Working paper (Federal Reserve Bank of Cleveland)

Journal of Monetary Economics, 2015

We show that a one-sector real business cycle model with variable capital utilization and mild in... more We show that a one-sector real business cycle model with variable capital utilization and mild increasing returns-to-scale is able to generate qualitatively as well as quantitatively realistic aggregate ‡uctuations driven by news shocks to future consumption demand. In sharp contrast to many studies in the existing expectations-driven business cycle literature, our results do not rely on non-separable preferences or investment adjustment costs.

Macroeconomic Dynamics, 2002

This paper examines the quantitative implications of government fiscal policy in a discrete-time ... more This paper examines the quantitative implications of government fiscal policy in a discrete-time one-sector growth model with a productive externality that generates social increasing returns to scale. Starting from a laissez-faire economy that exhibits local indeterminacy, we show that the introduction of a constant capital tax or subsidy can lead to various forms of endogenous fluctuations, including stable 2-, 4-, 8-, and 10-cycles, quasiperiodic orbits, and chaos. In contrast, a constant labor tax or subsidy has no effect on the qualitative nature of the model's dynamics. We show that the use of local steady-state analysis to detect the presence of multiple equilibria in this class of models can be misleading. For a plausible range of capital tax rates, the log-linearized dynamical system exhibits saddle-point stability, suggesting a unique equilibrium, whereas the true nonlinear model exhibits global indeterminacy. This result implies that stabilization policies designed to...

Journal of Economic Theory, 2004

It has been shown that under perfect competition and constant returns-to-scale, a onesector real ... more It has been shown that under perfect competition and constant returns-to-scale, a onesector real business cycle model may exhibit indeterminacy and sunspots when income tax rates are determined by a balanced-budget rule with a pre-set level of government expenditures. This paper shows that indeterminacy disappears if the government finances endogenous public spending and transfers with fixed income tax rates. Under this type of balanced-budget formulation, the economy exhibits saddle-path stability and equilibrium uniqueness, regardless of the source of government revenue and/or the existence of lumpsum transfers.

European Economic Review, 2006

International Journal of Economic Theory

Previous research has shown that in the context of a prototypical New Keynesian model, more progr... more Previous research has shown that in the context of a prototypical New Keynesian model, more progressive income taxation may lead to higher volatilities of hours worked and total output in response to a monetary disturbance. We analytically show that this business-cycle destabilization result is overturned within an otherwise identical macroeconomy subject to impulses to the household's utility formulation. Under a continuously or linearly progressive fiscal policy rule, an increase in the tax progressivity will always raise the degree of equilibrium nominal-wage rigidity, and thus serve as an automatic stabilizer that mitigates cyclical fluctuations driven by preference shocks. Our analysis illustrates that whether a more progressive tax schedule (de)stabilizes the business cycle depends crucially on the underlying driving source.

We show that a one-sector real business cycle model with mild increasing returns-to-scale, variab... more We show that a one-sector real business cycle model with mild increasing returns-to-scale, variable capital utilization and saddle-path stability is able to produce qualitatively realistic business cycles driven solely by disturbances to government purchases. Due to an endogenous increase in labor productivity, a positive spending shock can lead to simul-taneous increases in output, consumption, investment, employment and real wage. Our analysis illustrates a close relationship between this result and the recent literature that explores indeterminacy and sunspots in real business cycle models under laissez-faire. In particular, the condition which governs the required magnitude of increasing returns for government spending shocks to generate procyclical macroeconomic effects is identical to that necessary for a laissez-faire one-sector real business cycle model to exhibit local inde-terminacy.

We examine the theoretical interrelations between equilibrium (in)determinacy and economic growth... more We examine the theoretical interrelations between equilibrium (in)determinacy and economic growth in a one-sector representative-agent model of endogenous growth with progressive taxation of income and productive flow of public spending. We analytically show that if the demand-side effect of government purchases is weaker, the economy exhibits an indeterminate balanced-growth equilibrium and belief-driven growth fluctuations when the tax schedule is suffi ciently progressive or regressive. If the supply-side effect of public expenditures is weaker, indeterminacy and sunspots arise under progressive income taxation. In sharp contrast to traditional Keynesian-type stabilization policies, our analysis finds that raising the tax progressivity may destabilize an endogenously growing economy with fluctuations driven by agents’self-fulfilling expectations.

This paper examines the socially optimal (first-best) fiscal policy in a stochastic, infinite-hor... more This paper examines the socially optimal (first-best) fiscal policy in a stochastic, infinite-horizon representative agent model that exhibits consumption-enhanced as well as wealth-enhanced social status in the household utility. We show that the optimal labor tax rate is a positive constant that is used to correct negative consumption externalities. The optimal capital tax rate is also positive in order to overturn agents ’ status-seeking capital over-accumulation. Moreover, we find that in contrast to a conventional automatic stabilizer, the optimal capital tax moves in the opposite direction with shocks to firms’production technology. This result turns out to be qualitatively consistent with the discernible empirical evidence that many countries have implemented procyclical fiscal policies.

Standard dynamic small open economy models have predicted a counterfactual perfectly positive cor... more Standard dynamic small open economy models have predicted a counterfactual perfectly positive correlation between output and hours worked over the business cycle. In addi-tion, this class of models exhibits a weak internal propagation mechanism. To address these anomalies, this paper incorporates intertemporally non-separable labor supply and variable capital utilization into the canonical Mendoza model with adjustment costs of net investment. Our analysis shows that a dynamic, technology-shock driven small open econ-omy model with internal habit formation in labor hours and endogenous capital utilization is able to account for the main real business cycle regularities of Canada after 1981.

This paper systematically examines the interrelations between a progressive income tax schedule a... more This paper systematically examines the interrelations between a progressive income tax schedule and macroeconomic (in)stability in an otherwise standard one-sector real business model with productive government spending. We analytically show that the economy exhibits indeterminacy and sunspots only if the equilibrium wage-hours locus is positively sloped and steeper than the household's labor supply curve. Unlike in the framework with useless public expenditures, a less progressive tax policy may operate like an automatic stabilizer that mitigates belief-driven cyclical ‡uctuations. Our quantitative analysis shows that this result is able to provide a theoretically plausible explanation for the discernible reduction in U.S. output volatility after the Tax Reform Act of 1986 was implemented.

Standard dynamic small open economy models have predicted a counterfactual perfectly positive cor... more Standard dynamic small open economy models have predicted a counterfactual perfectly positive correlation between output and hours worked over the business cycle. In addition, this class of models exhibits a weak internal propagation mechanism. To address these anomalies, this paper incorporates intertemporally non-separable labor supply and variable capital utilization into the canonical Mendoza model with adjustment costs of net investment. Our analysis shows that a dynamic, technology-shock driven small open economy model with internal habit formation in labor hours and endogenous capital utilization is able to account for the main real business-cycle regularities of Canada after 1981.

Annals of Economics and Finance, 2009

We develop a one-sector endogenous growth model in which renewable natural resources are both a f... more We develop a one-sector endogenous growth model in which renewable natural resources are both a factor of production and measure of environmental quality. Along the balanced growth path, sustained economic growth and a non-deteriorating environment are shown to coexist. Moreover, steady-state economic growth and natural-resource utilization are positively related. Empirically, a cross-country growth regression that includes a broad measure of productive natural resources ia the Ecological Footprint ia provides strong support. Our estimation results also suggest conservation costs are minimal, and growth strategies based on greater physical capital formation and trade openness outperform those relying on more intensive utilization of the environment.

Previous research has shown that in the context of a prototypical New Keynesian model, more progr... more Previous research has shown that in the context of a prototypical New Keynesian model, more progressive income taxation may lead to higher volatilities of hours worked and total output in response to a monetary disturbance. We analytically show that this business-cycle destabilization result is overturned within an otherwise identical macroeconomy subject to impulses to the household's utility formulation. Under a continuously or linearly progressive fiscal policy rule, an increase in the tax progressivity will always raise the degree of equilibrium nominal-wage rigidity, and thus serve as an automatic stabilizer that mitigates cyclical fluctuations driven by preference shocks. Our analysis illustrates that whether a more progressive tax schedule (de)stabilizes the business cycle depends crucially on the underlying driving source.

This paper systematically examines the theoretical as well as quantitative interrelations between... more This paper systematically examines the theoretical as well as quantitative interrelations between government spending and disposable-income inequality in a tractable monopolistically competitive Ramsey macroeconomy. Upon a higher government size, we analytically show that whether the long-run after-tax Gini coeffi cient rises or falls depends on the sign and magnitude of the wealth inequality effect versus those of the adjusted-labor effect. Under (i) a mild level of productive public expenditures and (ii) a suffi ciently high intertemporal elasticity of consumption substitution, our calibrated model is able to generate qualitatively as well as quantitatively consistent income-inequality effects of government spending vis-à-vis recent estimation results.

Computing in Economics and Finance, 1999

Multiple-equilibria macroeconomic models suggest that consumers' and investors' perceptio... more Multiple-equilibria macroeconomic models suggest that consumers' and investors' perceptions about the state of the economy may be an important independent factor for business cycles. In this paper, we verify empirically the interrelations between waves of optimism and pessimism and subsequent economic fluctuations. We focus on the nonlinear behavior of non-fundamental movements in consumer sentiment, as a proxy for consumer's sunspots, and in business formation, representing animal spirits, around economic turning points. We find that bearish consumers and entrepreneurs are present before the onset of some U.S. economic downturns, even when the fundamentals are all very strong. In particular, our analysis suggests that waves of pessimism may have played a nontrivial role for the 1969-70 recession and slowdown, the 1981-82 recession, and the 1984-87 slowdown. The results are robust to a range of alternative linear and nonlinear specifications. Our evidence provides empiri...

This paper examines the theoretical as well as quantitative interrelations between equilibrium in... more This paper examines the theoretical as well as quantitative interrelations between equilibrium indeterminacy, increasing returns to product variety and sector-speci…c productive externalities within a two-sector real business cycle model. We analytically derive the necessary and su¢ cient condition under which the model exhibits an indeterminate steady state. In a calibrated version of our model economy, the threshold level of investment externalities that leads to belief-driven cyclical ‡uctuations is shown to be monotonically increasing with respect to the degree of market competitiveness. We also show that compared to three previous studies, our two-sector macroeconomy requires the lowest, and therefore the most empirically plausible, magnitude of productive externalities to generate endogenous business cycles. Keywords: Indeterminacy, Increasing Returns to Variety, Sector-Speci…c Externalities. JEL Classi…cation: E30, E32, O41. We would like to thank Been-Lon Chen, Shu-Hua Chen,...

In the context of a prototypical New Keynesian model, this paper examines the theoretical interre... more In the context of a prototypical New Keynesian model, this paper examines the theoretical interrelations between two tractable formulations of progressive taxation on labor income versus (i) the equilibrium degree of nominal wage rigidity as well as (ii) the resulting volatilities of hours worked and output in response to a monetary shock. In sharp contrast to the traditional stabilization view, we analytically show that linearly progressive taxation always operates like an automatic destabilizer which leads to higher cyclical ‡uctuations within the macroeconomy. We also obtain the same business cycle destabilization result under continuously progressive taxation if the initial degree of tax progressivity is su¢ cient low. Keywords: Progressive Taxation, Nominal Wage Rigidity, Automatic Stabilizer, Business Cycles. JEL Classi…cation: E12, E32, E62, We thank Nicolas Caramp, Juin-Jen Chang, Yi Mao, Victor Ortego-Marti, Chong-Kee Yip, and seminar participants at Academia Sinica and Chi...

This paper systematically examines the interrelations between equilibrium indeterminacy, endogeno... more This paper systematically examines the interrelations between equilibrium indeterminacy, endogenous entry and exit of intermediate-input firms, and increasing returns to specialization within two versions of a parsimonious one-sector monopolistically competitive real business cycle model. The technology for producing an intermediate good is postulated to display internal increasing returns-to-scale in our benchmark framework, whereas positive productive externalities are considered in the alternative setting. We analytically show that either formulation will exhibit belief-driven cyclical fluctuations if and only if the equilibrium wage-hours locus is positively sloped and steeper than the household's labor supply curve. We also find that ceteris paribus our alternative macroeconomy is more susceptible to indeterminacy and sunspots than the baseline counterpart.