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Steady state analysis and endogenous fluctuations in a finance constrained model

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Author Info
Thomas Seegmuller () (EUREQua)
Abstract

The overlapping generations model, like the one studied by Reichlin (1986) or Cazzavillan (2001), can be interpreted as an optimal growth economy where consumption is totally constrained by capital income. In this paper, we analyze steady states and dynamic properties of an extended version of such framework by considering that only a share of consumption expenditures is constrained by capital income. We notably establish that the steady state is not necessarily unique. Moreover, in contrast to the intuition, consumer welfare can increase at a steady state following a raise of the share of consumption constrained by capital income, i.e. the market imperfection. Concerning dynamics, we show that endogenous fluctuations (indeterminacy and cycles) can emerge depending on two parameters : the elasticity of intertemporal substitution in consumption and the elasticity of capital-labor substitution. Such fluctuations appear when these two parameters take values in accordance with empirical studies and without introducing increasing returns or imperfect competition.

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Paper provided by Université Panthéon-Sorbonne (Paris 1) in its series Cahiers de la Maison des Sciences Economiques with number v05029.

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Length: 25 pages
Date of creation: Apr 2005
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Handle: RePEc:mse:wpsorb:v05029

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Related research
Keywords: Finance constraint steady states indeterminacy endogenous cycles.

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Find related papers by JEL classification:
C62 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Existence and Stability Conditions of Equilibrium
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec.. [Downloadable!] (restricted)
  2. Barinci, Jean-Paul & Cheron, Arnaud, 2001. "Sunspots and the Business Cycle in a Finance Constrained Economy," Journal of Economic Theory, Elsevier, vol. 97(1), pages 30-49, March. [Downloadable!] (restricted)
  3. Marta Aloi & Huw D. Dixon & Teresa Lloyd-Braga, 1998. "Endogenous Fluctuations In an Open Economy with Increasing Returns to Scale," Discussion Papers 98-03, University of Copenhagen. Department of Economics. [Downloadable!]
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  1. Lloyd-Braga, Teresa & Modesto, Leonor & Seegmuller, Thomas, 2006. "Tax Rate Variability and Public Spending as Sources of Inderterminacy," CEPR Discussion Papers 5796, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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