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Animal spirits in cash-in-advance economies

Author

Listed:
  • Stefano Bosi
  • Frédéric Dufourt
  • Francesco Magris

Abstract

The possibility of indeterminacy and sunspot fluctuations in dynamic rational expectations models has been often questioned on empirical grounds, for such models are widely believed to rely on implausibly high degrees of increasing returns to scale and/or other controversial calibrations of economic fundamentals. In this paper, we study the occurrence of such phenomena in a standard (one-sector) optimal growth model with endogenous labor supply and a partial cash-in-advance constraint on consumption purchases. We show that, under standard preferences and constant returns to scale in production, indeterminacy typically prevails for an arbitrarily small amplitude of the liquidity constraint. We also analyze the cyclical properties of the model submitted to technological and beliefs disturbances and observe that it performs as well as comparable indeterminate models in the literature. JEL Classification: D90, E32, E41.

Suggested Citation

  • Stefano Bosi & Frédéric Dufourt & Francesco Magris, 2007. "Animal spirits in cash-in-advance economies," Recherches économiques de Louvain, De Boeck Université, vol. 73(2), pages 131-151.
  • Handle: RePEc:cai:reldbu:rel_732_0131
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    Cited by:

    1. Barbar, Riham & Bosi, Stefano, 2010. "Collaterals and macroeconomic volatility," Research in Economics, Elsevier, vol. 64(3), pages 146-161, September.
    2. Stefano Bosi & Francesco Magris & Alain Venditti, 2005. "Multiple equilibria in a cash-in-advance two-sector economy," International Journal of Economic Theory, The International Society for Economic Theory, vol. 1(2), pages 131-149.

    More about this item

    Keywords

    cash-in-advance; indeterminacy; business cycles;

    JEL classification:

    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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