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On Indeterminacy in Two Sector Models with Factor Market Distortions: The Importance of VIPIRS

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  • Eic W. Bond

    ()
    (Department of Economics, Vanderbilt University)

  • Robert A. Driskill

    ()
    (Department of Economics, Vanderbilt University)

Abstract

Previous literature has shown that local indeterminacy and local instability can arise in two-sector models when factor market distortions create a divergence between capital intensity ranking of the sectors on a physical basis and on a value basis. We identify a previously unnoticed source of indeterminacy that arises when there are value intensity - physical intensity reversals (VIPIRs), which is that there is a range of the phase plane in which there are 3 static equilibria (one with incomplete specialization and one with complete specialization in each of the respective goods). We show how this multiplicity of equilibria can be used to construct compound pathsin which the economy switches between production patterns over time. We show that in an open economy model with VIPIRs, there will exist compound paths that reach the steady in finite time. We also establish conditions for the existence of cyclical equilibria that alternate forever between specialization in the consumption and specialization in the investment good. Consideration of the compound paths can expand the range of parameter values for which the economy has a multiplicity of equilibrium paths and can generate paths to the steady in examples where the steady state is locally unstable.

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File URL: http://www.accessecon.com/pubs/VUECON/vu06-w26.pdf
File Function: First version, 2006
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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0626.

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Date of creation: Dec 2006
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Handle: RePEc:van:wpaper:0626

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

Related research

Keywords: Indeterminacy; multiple equilibria;

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References

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  1. Eric W. Bond & Kathleen Trask & Ping Wang, 1996. "Factor Accumulation and Trade: Dynamic Comparative Advantage with Endogenous Physical and Human Capital," Vanderbilt University Department of Economics Working Papers 0031, Vanderbilt University Department of Economics, revised Aug 2000.
  2. Boldrin, Michele & Deneckere, Raymond J., 1990. "Sources of complex dynamics in two-sector growth models," Journal of Economic Dynamics and Control, Elsevier, vol. 14(3-4), pages 627-653, October.
  3. Eric W. Bond & Ping Wang & Chong K. Yip, 1993. "A general two-sector model of endogenous growth with human and physical capital: balanced growth and transitional dynamics," Research Paper 9324, Federal Reserve Bank of Dallas.
  4. Neary, J Peter, 1978. "Dynamic Stability and the Theory of Factor-Market Distortions," American Economic Review, American Economic Association, vol. 68(4), pages 671-82, September.
  5. Jones, Ronald W, 1971. "Distortions in Factor Markets and the General Equilibrium Model of Production," Journal of Political Economy, University of Chicago Press, vol. 79(3), pages 437-59, May-June.
  6. Magee, Stephen P, 1973. "Factor Market Distortions, Production, and Trade: A Survey," Oxford Economic Papers, Oxford University Press, vol. 25(1), pages 1-43, March.
  7. Meng, Qinglai & Velasco, Andres, 2004. "Market imperfections and the instability of open economies," Journal of International Economics, Elsevier, vol. 64(2), pages 503-519, December.
  8. Ronald W. Jones, 1965. "The Structure of Simple General Equilibrium Models," Journal of Political Economy, University of Chicago Press, vol. 73, pages 557.
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Cited by:
  1. Yunfang Hu & Kazuo Mino, 2009. "Financial Integration and Aggregate Stability," Discussion Papers in Economics and Business 09-01, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).

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