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Income Effects and Indeterminacy in a Calibrated One-Sector Growth Model

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  • Nir Jaimovich

    () (Stanford University)

Abstract

This paper analyzes how the indeterminacy of competitive equilibrium in one-sector growth models depends on the magnitude of the households' income effect on the demand for leisure. The paper first establishes that the presence of income effect is necessary for the existence of an indeterminate equilibrium. I incorporate into this analysis the Jaimovich and Rebelo (2006) preferences that nest the KPR and GHH utility functions and span the entire range of income effect that exists between the two. Having identified these regions of indeterminacy, I find a lower and an upper bound for the magnitude of income effect that leads to indeterminacy. Moreover, by allowing for variation in the degree of income effect, I find that indeterminacy can occur for levels of aggregate-returns-to-scale that are well within recent empirical estimates. Finally, for these regions of indeterminacy, I simulate the model driven solely by sunspot shocks. I find that the second-moment properties of this model are generally consistent with the U.S. data at the business cycle frequency.

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Bibliographic Info

Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 07-012.

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Date of creation: Jul 2005
Date of revision: Mar 2007
Handle: RePEc:sip:dpaper:07-012

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Keywords: Indeterminate Equilibria; Utility Function; Sunspot Shocks; Business Cycles;

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References

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  2. Benhabib, Jess & Farmer, Roger E.A., 1999. "Indeterminacy and sunspots in macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 6, pages 387-448 Elsevier.
  3. Kehoe, Timothy J & Levine, David K & Romer, Paul M, 1992. "On Characterizing Equilibria of Economies with Externalities and Taxes as Solutions to Optimization Problems," Economic Theory, Springer, vol. 2(1), pages 43-68, January.
  4. Benhabib, Jess & Farmer, Roger E. A., 1996. "Indeterminacy and sector-specific externalities," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 421-443, June.
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  6. Benhabib, Jess & Nishimura, Kazuo, 1998. "Indeterminacy and Sunspots with Constant Returns," Journal of Economic Theory, Elsevier, vol. 81(1), pages 58-96, July.
  7. Nir Jaimovich & Sergio Rebelo, 2006. "Can News About the Future Drive the Business Cycle?," NBER Working Papers 12537, National Bureau of Economic Research, Inc.
  8. Correia, Maria Isabel Horta & Neves, Joao C & Rebelo, Sérgio, 1994. "Business Cycles in a Small Open Economy," CEPR Discussion Papers 996, C.E.P.R. Discussion Papers.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Sunspots and Credit Frictions
    by Christian Zimmermann in NEP-DGE blog on 2010-01-25 03:20:38
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Cited by:
  1. Guo, Jang-Ting & Harrison, Sharon G., 2010. "Indeterminacy with no-income-effect preferences and sector-specific externalities," Journal of Economic Theory, Elsevier, vol. 145(1), pages 287-300, January.
  2. Nishimura, Kazuo & Venditti, Alain, 2010. "Indeterminacy and expectation-driven fluctuations with non-separable preferences," Mathematical Social Sciences, Elsevier, vol. 60(1), pages 46-56, July.
  3. Daniel R. Carroll & Eric R. Young, 2009. "A note on sunspots with heterogeneous agents," Working Paper 0906, Federal Reserve Bank of Cleveland.

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