Indeterminacy with Externalities and Capital Utilization
AbstractIn 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 InfoPaper 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.
Length: 26 pages
Date of creation: 2008
Date of revision:
Externalities; Variable capital utilization; Indeterminacy; Bifurcations;
Find related papers by JEL classification:
- E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
- O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
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