The cyclical behaviour of wages and profits under imperfect competition

We build a dynamic model of the business cycle with monopolistically competitive firms. With simple assumptions concerning firm entry and exit, the model can explain some stylized facts of the business cycle that standard real business cycle models cannot predict. They include the cyclical behaviour of the shares of capital and labour income in total income and the pattern of net firm creation. These predictions are robust to whether the main source of the business cycle is aggregate supply-shocks or aggregate demand shocks. JEL classification E32, E62.