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Indeterminancy and Sunspots with Constant Returns

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  • Benhabib, Jess
  • Nishimura, Kazuo

Abstract

We show that indeterminacy can easily arise in multi-sector models that have constant variable returns to scale and very small market imperfections. This is in sharp contrast to models that require increasing returns to generate indeterminacy, and which have been criticized on the basis of recent empirical estimates indicating that returns to scale are roughly constant, and that market imperfections are small. We also show that we can calibrate our constant returns model with sunspots, using standard parametrizations to produce a close match to the moments of aggregate consumption, investment, output and employment in U.S. data.

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Bibliographic Info

Paper provided by C.V. Starr Center for Applied Economics, New York University in its series Working Papers with number 96-44.

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Length: 48 pages
Date of creation: 1996
Date of revision:
Handle: RePEc:cvs:starer:96-44

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Postal: C.V. Starr Center, Department of Economics, New York University, 19 W. 4th Street, 6th Floor, New York, NY 10012
Phone: (212) 998-8936
Fax: (212) 995-3932
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Web page: http://econ.as.nyu.edu/object/econ.cvstarr.html
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Postal: C.V. Starr Center, Department of Economics, New York University, 19 W. 4th Street, 6th Floor, New York, NY 10012
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Keywords: Indeterminacy; multiple equilibria; sunspots;

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  1. Black, Fischer, 1974. "Uniqueness of the price level in monetary growth models with rational expectations," Journal of Economic Theory, Elsevier, vol. 7(1), pages 53-65, January.
  2. Danyang Xie, 2002. "Divergence in Economic Performance: Transitional Dynamics with Multiple Equilibria," GE, Growth, Math methods 0210002, EconWPA.
  3. Julio J. Rotemberg & Michael Woodford, 1989. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," NBER Working Papers 3206, National Bureau of Economic Research, Inc.
  4. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 921-47, October.
  5. Jordi GalĂ­, 1993. "Monopolistic competition, business cycles and the composition of aggregate demand," Economics Working Papers 45, Department of Economics and Business, Universitat Pompeu Fabra.
  6. Benhabib, Jess & Perli, Roberto & Xie, Danyang, 1994. "Monopolistic competition, indeterminacy and growth," MPRA Paper 37411, University Library of Munich, Germany, revised 1994.
  7. Benhabib Jess & Rustichini Aldo, 1994. "Introduction to the Symposium on Growth, Fluctuations, and Sunspots: Confronting the Data," Journal of Economic Theory, Elsevier, vol. 63(1), pages 1-18, June.
  8. Chatterjee, Satyajit & Cooper, Russell, 1989. "Multiplicity of Equilibria and Fluctuations in Dynamic Imperfectly Competitive Economies," American Economic Review, American Economic Association, vol. 79(2), pages 353-57, May.
  9. Benhabib, Jess & Farmer, Roger E.A., 1995. "Indeterminacy and Sector-Specific Externalities," Working Papers 95-02, C.V. Starr Center for Applied Economics, New York University.
  10. Burnside, Craig, 1996. "Production function regressions, returns to scale, and externalities," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 177-201, April.
  11. Farmer Roger E. A. & Guo Jang-Ting, 1994. "Real Business Cycles and the Animal Spirits Hypothesis," Journal of Economic Theory, Elsevier, vol. 63(1), pages 42-72, June.
  12. Benhabib, Jess & Nishimura, Kazuo, 1979. "The hopf bifurcation and the existence and stability of closed orbits in multisector models of optimal economic growth," Journal of Economic Theory, Elsevier, vol. 21(3), pages 421-444, December.
  13. Farmer, Roger E. A. & Jang-Ting, Guo, 1995. "The econometrics of indeterminacy: an applied study," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 225-271, December.
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