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Global indeterminacy in locally determinate RBC models

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  • Tarek Coury
  • Yi Wen

Abstract

We investigate the global dynamics of RBC models with production externalities. We confirm that purely local analysis does not tell the full story. With externalities smaller than required for local indeterminacy, local analysis shows the steady state to be a saddle, implying a unique equilibrium. But global analysis reveals the steady state is surrounded by stable deterministic cycles. Our analysis suggests that indeterminacy is more robust than previously realized, and the results strengthen the view that caution should be exercised when linearized versions of this class of RBC models are used in applied work.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2007-029.

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Date of creation: 2007
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Handle: RePEc:fip:fedlwp:2007-029

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Keywords: Business cycles;

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Cited by:
  1. Yi Wen & Huabin Wu, 2011. "Dynamics of externalities: a second-order perspective," Review, Federal Reserve Bank of St. Louis, issue May, pages 187-206.
  2. Daniel R. Carroll & Eric R. Young, 2009. "A note on sunspots with heterogeneous agents," Working Paper 0906, Federal Reserve Bank of Cleveland.
  3. Chen, Yan & Zhang, Yan, 2008. "Tariff Policy, Increasing Returns and Endogenous Fluctuations," MPRA Paper 10061, University Library of Munich, Germany.

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