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Indeterminacy and Unemployment Fluctuations with Constant Returns to Scale in Production

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Author Info
Dufourt, Frédéric
Lloyd-Braga, Teresa
Modesto, Leonor

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Abstract

We extend the finance-constrained economy proposed by Woodford (1986) to incorporate imperfectly insured unemployment, by introducing unions and unemployment benefits financed by labour taxation. We show that this simple extension of the Woodford model changes drastically its stability conditions and local dynamics around the steady state. In fact, in contrast to related models in the literature, we find that under constant returns to scale in production: (i) indeterminacy always prevails in the case of a unitary elasticity of substitution between capital and labour; (ii) flip and Hopf bifurcations occur for empirically credible elasticities of substitution between capital and labour, so that a rich set of dynamics may emerge at ‘realistic’ parameters’ values.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4874.

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Date of creation: Jan 2005
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Handle: RePEc:cpr:ceprdp:4874

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Related research
Keywords: bifurcations; endogenous fluctuations; imperfectly insured unemployment; indeterminacy;

Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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This page was last updated on 2009-11-25.

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