Monopolistic competition, increasing returns to specialization and output persistence

Devereux et al. (Economics Letters, 1993, 41, 57–61) showed that introducing together imperfect competition and increasing returns to specialization into Real Business Cycle (RBC)-type models results in making output more persistent than the underlying technology shocks. We carry out a simple generalization of their model, which clearly disentangles the two features, and show that the added persistence is actually because of the increasing returns to specialization