LAUSR

We extend the Real Business Cycle framework to any symmetric preferences over a variety of goods supplied under monopolistic, Bertrand or Cournot competition with a fixed or endogenous number of firms, and derive the implications for business cycles and optimal taxation. With an exogenous number of goods, the model delivers a modified Euler equation when preferences are non-homothetic: if the endogenous markups are countercyclical the impact of shocks on consumption and labor supply is magnified through new intertemporal substitution mechanisms, and the optimal fiscal policy requires a countecyclical labor income subsidy and a capital income tax that is positive along the growth path and converging to zero in the long run. With an endogenous number of goods, also entry affects markups and the optimal fiscal policy requires also a tax on profits.