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Indeterminacy, Bifurcations, And Unemployment Fluctuations

  • DUFOURT, FRÉDÉRIC
  • LLOYD-BRAGA, TERESA
  • MODESTO, LEONOR

We incorporate imperfectly insured unemployment in the finance constrained economy proposed by Woodford (1986), by introducing unions and unemployment benefits financed by labor taxation. We show that this simple extension of the Woodford model changes drastically its stability conditions and local dynamics around the steady state. In fact, in contrast to related models in the literature, we find that, under constant returns to scale in production: (i) indeterminacy always prevails in the case of a unitary elasticity of substitution between capital and labor; (ii) flip and Hopf bifurcations occur for empirically credible elasticities of substitution between capital and labor, so that a rich set of dynamics may emerge at "realistic" parameters' values.

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Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 12 (2008)
Issue (Month): S1 (April)
Pages: 75-89

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Handle: RePEc:cup:macdyn:v:12:y:2008:i:s1:p:75-89_07
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  1. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
  2. Lloyd-Braga, Teresa & Modesto, Leonor, 2004. "Indeterminacy in a Finance Constrained Unionized Economy," CEPR Discussion Papers 4679, C.E.P.R. Discussion Papers.
  3. Benhabib Jess & Farmer Roger E. A., 1994. "Indeterminacy and Increasing Returns," Journal of Economic Theory, Elsevier, vol. 63(1), pages 19-41, June.
  4. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  5. GRANDMONT, Jean-Michel & PINTUS, Patrick & de VILDER, Robin, 1997. "Capital-labor substitution and competitive nonlinear endogenous business cycles," CORE Discussion Papers 1997087, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Stephanie Schmitt-Grohe & Martin Uribe, 1995. "Balanced-budget rules, distortionary taxes, and aggregate instability," Finance and Economics Discussion Series 95-44, Board of Governors of the Federal Reserve System (U.S.).
  7. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
  8. G, Cazzavillan & T, Lloyd-Braga & P, A, Pintus, 1997. "Multiple Steady States and Endogenous Fluctuations with Increasing Returns to Scale in Production," Working Papers 97-29, Centre de Recherche en Economie et Statistique.
  9. Susanto Basu & John G. Fernald, 1996. "Returns to scale in U.S. production: estimates and implications," International Finance Discussion Papers 546, Board of Governors of the Federal Reserve System (U.S.).
  10. Duffy, John & Papageorgiou, Chris, 2000. "A Cross-Country Empirical Investigation of the Aggregate Production Function Specification," Journal of Economic Growth, Springer, vol. 5(1), pages 87-120, March.
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