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Indeterminacy with No-Income-Effect Preferences and Sector-Specific Externalities

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  • Jang-Ting Guo

    ()
    (Department of Economics, University of California Riverside)

  • Sharon G. Harrison

    ()
    (Department of Economics, Barnard College, Columbia University)

Abstract

We examine a two-sector real business cycle model with sector-specific externalities in the production of distinct consumption and investment goods. In addition, the household utility is postulated to exhibit no income effect on the demand for leisure. Unlike in the one-sector counterpart, we show that equilibrium indeterminacy can result with sufficiently high returns-to-scale in the production of investment goods. We also find that the smaller the labor supply elasticity, the lower the threshold level of returns-to-scale needed for generating indeterminacy and sunspots. This finding turns out to be exactly the opposite of that in all existing RBC-based indeterminacy studies.

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File URL: http://economics.ucr.edu/papers/papers08/08-09.pdf
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Bibliographic Info

Paper provided by University of California at Riverside, Department of Economics in its series Working Papers with number 200809.

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Length: 13 pages
Date of creation: Jul 2008
Date of revision: Jul 2008
Handle: RePEc:ucr:wpaper:200809

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Keywords: Indeterminacy; Income Effect; Sector-Specific Externalities;

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References

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  1. Benhabib Jess & Farmer Roger E. A., 1994. "Indeterminacy and Increasing Returns," Journal of Economic Theory, Elsevier, Elsevier, vol. 63(1), pages 19-41, June.
  2. Susanto Basu & John G. Fernald, 1996. "Returns to scale in U.S. production: estimates and implications," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 546, Board of Governors of the Federal Reserve System (U.S.).
  3. Killingsworth, Mark R. & Heckman, James J., 1987. "Female labor supply: A survey," Handbook of Labor Economics, Elsevier, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 2, pages 103-204 Elsevier.
  4. Richard Blundell & Thomas MaCurdy, 1998. "Labour supply: a review of alternative approaches," IFS Working Papers, Institute for Fiscal Studies W98/18, Institute for Fiscal Studies.
  5. Benhabib, Jess & Nishimura, Kazuo, 1998. "Indeterminacy and Sunspots with Constant Returns," Journal of Economic Theory, Elsevier, Elsevier, vol. 81(1), pages 58-96, July.
  6. Jess Benhabib & Richard Rogerson & Randall Wright, 1991. "Homework in macroeconomics: household production and aggregate fluctuations," Staff Report, Federal Reserve Bank of Minneapolis 135, Federal Reserve Bank of Minneapolis.
  7. Roger E.A. Farmer, 1994. "Indeterminacy and Sector-Specific Externalities," UCLA Economics Working Papers, UCLA Department of Economics 722, UCLA Department of Economics.
  8. Benhabib, J. & Meng, Q. & Nishimura, K., 1999. "Indeterminacy Under Constant Returns to Scale in Multisector Economies," Working Papers, C.V. Starr Center for Applied Economics, New York University 99-17, C.V. Starr Center for Applied Economics, New York University.
  9. Roberto Perli, . "Indeterminacy, Home Production, and the Business Cycle: a Calibrated Analysis," CARESS Working Papres, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences 97-4, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
  10. Marco Maffezzoli, 2000. "Human Capital and International Real Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 137-165.
  11. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, American Economic Association, vol. 78(3), pages 402-17, June.
  12. Benhabib, Jess & Farmer, Roger E.A., 1999. "Indeterminacy and sunspots in macroeconomics," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 6, pages 387-448 Elsevier.
  13. Shea, John, 1993. "Do Supply Curves Slope Up?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(1), pages 1-32, February.
  14. Nir Jaimovich, 2005. "Income Effects and Indeterminacy in a Calibrated One-Sector Growth Model," Discussion Papers, Stanford Institute for Economic Policy Research 07-012, Stanford Institute for Economic Policy Research, revised Mar 2007.
  15. Harrison, Sharon G., 2001. "Indeterminacy in a model with sector-specific externalities," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 25(5), pages 747-764, May.
  16. Perli, Roberto & Sakellaris, Plutarchos, 1998. "Human capital formation and business cycle persistence," Journal of Monetary Economics, Elsevier, Elsevier, vol. 42(1), pages 67-92, June.
  17. Farmer Roger E. A. & Guo Jang-Ting, 1994. "Real Business Cycles and the Animal Spirits Hypothesis," Journal of Economic Theory, Elsevier, Elsevier, vol. 63(1), pages 42-72, June.
  18. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 36(2), pages 269-300, November.
  19. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, American Economic Association, vol. 86(1), pages 112-32, March.
  20. Meng, Qinglai & Yip, Chong Kee, 2008. "On indeterminacy in one-sector models of the business cycle with factor-generated externalities," Journal of Macroeconomics, Elsevier, Elsevier, vol. 30(1), pages 97-110, March.
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Citations

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Cited by:
  1. Magris, Francesco, 2012. "Indeterminacy and multiple steady states with sector-specific externalities," Economic Modelling, Elsevier, Elsevier, vol. 29(6), pages 2664-2672.
  2. Juin-Jen Chang & Jang-Ting Guo & Jhy-Yuan Shieh & Wei-Neng Wang, 2013. "Sectoral Composition of Government Spending and Macroeconomic (In)stability," IEAS Working Paper : academic research, Institute of Economics, Academia Sinica, Taipei, Taiwan 13-A010, Institute of Economics, Academia Sinica, Taipei, Taiwan.
  3. Nishimura, Kazuo & Venditti, Alain, 2010. "Indeterminacy and expectation-driven fluctuations with non-separable preferences," Mathematical Social Sciences, Elsevier, Elsevier, vol. 60(1), pages 46-56, July.

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