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Indeterminacy and sector-specific externalities

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  • Benhabib, Jess
  • Farmer, Roger E. A.

Abstract

We introduce mild increasing returns to scale into a version of the Real Business Cycle model. These increasing returns to scale occur as a consequence of sector-specific externalities, that is, externalities where the output of the consumption and investment sectors have external effects on the output of firms within their own sector. Keeping the production technologies for both sectors identical, for expositional simplicity, we show that indeterminacy can easily occur for parameter values typically used in the real business cycle literature, and in contrast to some earlier literature on indeterminacies, for externalities mild enough so that labour demand curves are downward sloping.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 37 (1996)
Issue (Month): 3 (June)
Pages: 421-443

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Handle: RePEc:eee:moneco:v:37:y:1996:i:3:p:421-443

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Web page: http://www.elsevier.com/locate/inca/505566

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  12. Benhabib, Jess & Farmer, Roger E.A., 1996. "Indeterminacy and Sector-Specific Externalities," Working Papers 96-12, C.V. Starr Center for Applied Economics, New York University.
  13. Howitt, Peter & McAfee, R Preston, 1988. "Stability of Equilibria with Externalities," The Quarterly Journal of Economics, MIT Press, vol. 103(2), pages 261-77, May.
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  24. Benhabib, Jess & Perli, Roberto & Xie, Danyang, 1994. "Monopolistic competition, indeterminacy and growth," MPRA Paper 37411, University Library of Munich, Germany, revised 1994.
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