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On indeterminacy in one-sector models of the business cycle with factor-generated externalities

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  • Meng, Qinglai
  • Yip, Chong Kee

Abstract

By relaxing the restrictions commonly imposed on the magnitude of capital externalities in one-sector models with Cobb-Douglas technology, we find that indeterminacy can arise in the following two cases: (i) the felicity function is separable in consumption and leisure and there are negative capital externalities; (ii) the felicity function is non-separable and the social elasticity of production with respect to capital is greater than one. In both cases indeterminacy happens when the aggregate labor-demand curve is downward-sloping. In addition, with Cobb-Douglas technology we show that the presence of income effects on the demand for leisure is a necessary condition for indeterminacy to occur, and that therefore for certain felicity functions characterized by the presence of no income effects indeterminacy can never occur regardless of the signs and magnitudes of capital and labor externalities.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 30 (2008)
Issue (Month): 1 (March)
Pages: 97-110

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Handle: RePEc:eee:jmacro:v:30:y:2008:i:1:p:97-110

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Web page: http://www.elsevier.com/locate/inca/622617

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  1. Wen, Yi, 2001. "Understanding self-fulfilling rational expectations equilibria in real business cycle models," Journal of Economic Dynamics and Control, Elsevier, vol. 25(8), pages 1221-1240, August.
  2. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
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  4. Harrison, Sharon G., 2001. "Indeterminacy in a model with sector-specific externalities," Journal of Economic Dynamics and Control, Elsevier, vol. 25(5), pages 747-764, May.
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  7. Bennett, R.L. & Farmer, R.E.A., 1999. "Indeterminacy with Non-Separable Utility," Economics Working Papers eco99/34, European University Institute.
  8. Kehoe, Timothy J., 1991. "Computation and multiplicity of equilibria," Handbook of Mathematical Economics, Elsevier, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 38, pages 2049-2144 Elsevier.
  9. Benhabib, Jess & Nishimura, Kazuo, 1998. "Indeterminacy and Sunspots with Constant Returns," Journal of Economic Theory, Elsevier, vol. 81(1), pages 58-96, July.
  10. Schmitt-Grohé, Stephanie, 1999. "Endogenous Business Cycles and the Dynamics of Output, Hours, and Consumption," CEPR Discussion Papers 2315, C.E.P.R. Discussion Papers.
  11. Michele Boldrin & Aldo Rustichini, 2010. "Growth and Indeterminacy in Dynamic Models with Externalities," Levine's Working Paper Archive 1382, David K. Levine.
  12. Pelloni, A. & Waldmann, R., 1997. "Stability Properties in a Growth Model," Economics Working Papers eco97/11, European University Institute.
  13. Benhabib, Jess & Farmer, Roger E.A., 1999. "Indeterminacy and sunspots in macroeconomics," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 6, pages 387-448 Elsevier.
  14. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 21(2-3), pages 195-232.
  15. Sharon G. Harrison, 2003. "Returns to Scale and Externalities in the Consumption and Investment Sectors," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 963-976, October.
  16. Hintermaier, Thomas, 2003. "On the minimum degree of returns to scale in sunspot models of the business cycle," Journal of Economic Theory, Elsevier, vol. 110(2), pages 400-409, June.
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Blog mentions

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  1. Sunspots and Credit Frictions
    by Christian Zimmermann in NEP-DGE blog on 2010-01-25 03:20:38
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Cited by:
  1. Carboni, Oliviero A. & Russu, Paolo, 2013. "Linear production function, externalities and indeterminacy in a capital-resource growth model," Journal of Mathematical Economics, Elsevier, vol. 49(5), pages 422-428.
  2. Long Xin & Pelloni Alessandra, 2011. "Welfare improving taxation on savings in a growth model," wp.comunite 0091, Department of Communication, University of Teramo.
  3. Guo, Jang-Ting & Harrison, Sharon G., 2010. "Indeterminacy with no-income-effect preferences and sector-specific externalities," Journal of Economic Theory, Elsevier, vol. 145(1), pages 287-300, January.
  4. Wong, Tsz-Nga & Yip, Chong K., 2010. "Indeterminacy and the elasticity of substitution in one-sector models," Journal of Economic Dynamics and Control, Elsevier, vol. 34(4), pages 623-635, April.
  5. Nishimura, Kazuo & Venditti, Alain, 2010. "Indeterminacy and expectation-driven fluctuations with non-separable preferences," Mathematical Social Sciences, Elsevier, vol. 60(1), pages 46-56, July.
  6. McGough, Bruce & Meng, Qinglai & Xue, Jianpo, 2013. "Expectational stability of sunspot equilibria in non-convex economies," Journal of Economic Dynamics and Control, Elsevier, vol. 37(6), pages 1126-1141.
  7. Antoci, Angelo & Galeotti, Marcello & Russu, Paolo, 2011. "Poverty trap and global indeterminacy in a growth model with open-access natural resources," Journal of Economic Theory, Elsevier, vol. 146(2), pages 569-591, March.
  8. Magris, Francesco, 2012. "Indeterminacy and multiple steady states with sector-specific externalities," Economic Modelling, Elsevier, vol. 29(6), pages 2664-2672.
  9. Jang-Ting Guo & Sharon G. Harrison, 2014. "Indeterminacy with Progressive Taxation and Sector-Specific Externalities," Working Papers 201403, University of California at Riverside, Department of Economics.

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