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Indeterminacy with Externalities and Capital Utilization

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  • Mohanad Ismael

    ()
    (University of Evry Val d’Essonne, EPEE)

  • Francesco Magris

    ()
    (University of Evry Val d’Essonne, EPEE)

Abstract

In this paper, we present a dynamic general equilibrium model with two sectors: one aggregate firm produces consumption good and a second one investment good. We assume sector specific as well as aggregate ex- ternalities. Moreover, we account for variable capital utilization i.e. the depreciation rate is endogenously determined by the degree of capital ex- ploitation. We show that under mild conditions, multiple equilibria occur. Indeed, following Grandmont, Pintus and de Vilder (JET, 1998), we can identify the necessary conditions for which the economic dynamics does change stability. In our framework, the capital utilization improves the imperfection in production sectors, resulted from the specific and aggre- gate externalities. We show that endogenous fluctuations are more likely to appear as long as the sensitivity of the capital utilization is su¢ ciently high with respect to the capital. Further, this is true for low value of elasticity of factor substitution.

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Bibliographic Info

Paper provided by Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne in its series Documents de recherche with number 08-14.

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Length: 26 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:eve:wpaper:08-14

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Related research

Keywords: Externalities; Variable capital utilization; Indeterminacy; Bifurcations;

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References

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  1. Bils, Mark & Cho, Jang-Ok, 1994. "Cyclical factor utilization," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 319-354, April.
  2. Ingram, B.F. & DeJong, D.N. & Whiteman, C.H. & Wen, Y., 1996. "Cyclical Implications of the Variable Utilization of Physical and Human Capital," Working Papers 96-12, University of Iowa, Department of Economics.
  3. Chatterjee, Santanu, 2005. "Capital utilization, economic growth and convergence," Journal of Economic Dynamics and Control, Elsevier, vol. 29(12), pages 2093-2124, December.
  4. Bernstein, Jeffrey I. & Nadiri, M. Ishaq, 1987. "Investment, Depreciation and Capital Utilization," Working Papers 87-08, C.V. Starr Center for Applied Economics, New York University.
  5. Taubman, Paul & Wilkinson, Maurice, 1970. "User Cost, Capital Utilization and Investment Theory," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 11(2), pages 209-15, June.
  6. Jess Benhabib & Roger E.A. Farmer, 1992. "Indeterminacy and Increasing Returns," UCLA Economics Working Papers 646, UCLA Department of Economics.
  7. Roger E.A. Farmer & Jang Ting Guo, 1992. "Real Business Cycles and the Animal Spirits Hypothesis," UCLA Economics Working Papers 680, UCLA Department of Economics.
  8. Benhabib, J. & Nishimura, K. & Venditti, A., 1999. "Indeterminacy and Cycles in Two-Sector Discrete-Time Models," G.R.E.Q.A.M. 99a58, Universite Aix-Marseille III.
  9. Craig Burnside & Martin Eichenbaum, 1994. "Factor Hoarding and the Propagation of Business Cycles Shocks," NBER Working Papers 4675, National Bureau of Economic Research, Inc.
  10. Wen, Yi, 1998. "Capacity Utilization under Increasing Returns to Scale," Journal of Economic Theory, Elsevier, vol. 81(1), pages 7-36, July.
  11. Harrison, Sharon G. & Weder, Mark, 2002. "Tracing externalities as sources of indeterminacy," Journal of Economic Dynamics and Control, Elsevier, vol. 26(5), pages 851-867, May.
  12. Alain Venditti, 2006. "Capital Externalities in Two-Sector Models," Working Papers halshs-00410761, HAL.
  13. Grandmont, Jean-Michel & Pintus, Patrick & de Vilder, Robin, 1998. "Capital-Labor Substitution and Competitive Nonlinear Endogenous Business Cycles," Journal of Economic Theory, Elsevier, vol. 80(1), pages 14-59, May.
  14. 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.
  15. Patrick Pintus, 2006. "Indeterminacy with almost constant returns to scale: capital-labor substitution matters," Economic Theory, Springer, vol. 28(3), pages 633-649, 08.
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