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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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  1. Neumeyer, Pablo A. & Perri, Fabrizio, 2005. "Business cycles in emerging economies: the role of interest rates," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 345-380, March.
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  4. Benhabib, Jess & Farmer, Roger E.A., 1991. "Indeterminacy and Increasing Returns," Working Papers 91-59, C.V. Starr Center for Applied Economics, New York University.
  5. Schmitt-Grohe, Stephanie, 1997. "Comparing Four Models of Aggregate Fluctuations due to Self-Fulfilling Expectations," Journal of Economic Theory, Elsevier, vol. 72(1), pages 96-147, January.
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  7. Timothy J. Kehoe, 1991. "Computation and multiplicity of equilibria," Working Papers 460, Federal Reserve Bank of Minneapolis.
  8. Bennett, R.L. & Farmer, R.E.A., 1999. "Indeterminacy with Non-Separable Utility," Economics Working Papers eco99/34, European University Institute.
  9. Wen, Yi, 1998. "Capacity Utilization under Increasing Returns to Scale," Journal of Economic Theory, Elsevier, vol. 81(1), pages 7-36, July.
  10. 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.
  11. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  12. Schmitt-Grohé, Stephanie, 1999. "Endogenous Business Cycles and the Dynamics of Output, Hours, and Consumption," CEPR Discussion Papers 2315, C.E.P.R. Discussion Papers.
  13. Nir Jaimovich & Sergio Rebelo, 2009. "Can News about the Future Drive the Business Cycle?," American Economic Review, American Economic Association, vol. 99(4), pages 1097-1118, September.
  14. Benhabib, Jess & Farmer, Roger E.A., 1996. "Indeterminacy and Sector-Specific Externalities," Working Papers 96-12, C.V. Starr Center for Applied Economics, New York University.
  15. Basu, Susanto & Fernald, John G, 1997. "Returns to Scale in U.S. Production: Estimates and Implications," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 249-83, April.
  16. 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.
  17. Michele Boldrin & Aldo Rustichini, 2010. "Growth and Indeterminacy in Dynamic Models with Externalities," Levine's Working Paper Archive 1382, David K. Levine.
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  19. Harrison, Sharon G., 2001. "Indeterminacy in a model with sector-specific externalities," Journal of Economic Dynamics and Control, Elsevier, vol. 25(5), pages 747-764, May.
  20. Benhabib, Jess & Nishimura, Kazuo, 1998. "Indeterminacy and Sunspots with Constant Returns," Journal of Economic Theory, Elsevier, vol. 81(1), pages 58-96, July.
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  22. Spear, Stephen E., 1991. "Growth, externalities, and sunspots," Journal of Economic Theory, Elsevier, vol. 54(1), pages 215-223, June.
  23. Wen, Yi, 2000. "Understanding Self-Fulfilling Rational Expectations Equilibria in Real Business Cycle Models," Working Papers 00-02, Cornell University, Center for Analytic Economics.
  24. Matsuyama, Kiminori, 1991. "Increasing Returns, Industrialization, and Indeterminacy of Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 617-50, May.
  25. Harrison, Sharon G. & Weder, Mark, 2002. "Tracing externalities as sources of indeterminacy," Journal of Economic Dynamics and Control, Elsevier, vol. 26(5), pages 851-867, May.
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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. Nourry, Carine & Seegmuller, Thomas & Venditti, Alain, 2013. "Aggregate instability under balanced-budget consumption taxes: A re-examination," Journal of Economic Theory, Elsevier, vol. 148(5), pages 1977-2006.
  3. Daniel R. Carroll & Eric R. Young, 2009. "A note on sunspots with heterogeneous agents," Working Paper 0906, Federal Reserve Bank of Cleveland.
  4. Kazuo Nishimura & Alain Venditti, 2010. "Indeterminacy and expectation-driven uctuations with non-separable preferences," KIER Working Papers 702, Kyoto University, Institute of Economic Research.

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