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Endogenous Business Cycles and Liquidity Constraint

Author

Listed:
  • Stefano Bosi

    (EPEE, Université d’Evry)

  • Francesco Magris

    (DAE, University of Cambridge)

Abstract

It is well known from the literature that the introduction of liquidity constraints in infinite-horizon economies may be responsible for the occurrence of local indeterminacy and sunspot fluctuations. Yet, the question of the robustness of such phenomena when the constraints are progressively relaxed, and the possibility of intertemporal arbitrage on the part of the agents increases, remains open. In this paper we study such an issue by departing from the Cazzavillan et al. (1998) framework with heterogeneous agents,financial constraint on wage income, and positive externalities in aggregate capital and labor. We observe that local indeterminacy and sunspot fluctuations persist for a wide range of amplitudes of the liquidity constraint, although they finally disappear when the ”degree” of liquidity of the economy is made arbitrarily large.

Suggested Citation

  • Stefano Bosi & Francesco Magris, 1999. "Endogenous Business Cycles and Liquidity Constraint," Documents de recherche 99-18, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
    • Handle: RePEc:eve:wpaper:99-18
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    More about this item

    Keywords

    Liquidity constraint; Indeterminacy; Sunspot equilibria;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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