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Skills, sunspots and cycles

  • Francesco Busato
  • Enrico Marchetti

    ()

    (Department of Economics, University of Aarhus, Denmark)

This paper explores the ability of a class of one-sector, multi-input models to generate indeterminate equilibrium paths, and endogenous cycles, without relying on factors' hoarding. The model presents a novel theoretical economic mechanism that supports sunspot-driven expansions without requiring upward sloping labor demand schedules. Its distinctive characteristic is that the skill composition of aggregate labor demand drives expansionary i.i.d. demand shocks. Next, the model explains the labor market dynamics from the supply side, while endogenizing the capital productivity response to changes in the aggregate labor demand composition. Last but not least, it is worth to mention that the model presents an effective shock propagation mechanism that operates into the labor market and across labor market segments through the cross elasticities of equilibrium labor demand and supplies. In this respect the model can be seen as quite general formulation (with or without aggregate increasing returns to scale) for analyzing labor market dynamics within a general equilibrium model with labor market segmentation.

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File URL: ftp://ftp.econ.au.dk/afn/wp/06/wp06_07.pdf
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Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2006-07.

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Length: 27
Date of creation: 31 May 2006
Date of revision:
Handle: RePEc:aah:aarhec:2006-07
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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  1. Teresa Lloyd-Braga & Carine Nourry & Alain Venditti, 2006. "Indeterminacy with small externalities: The role of non-separable preferences," International Journal of Economic Theory, The International Society for Economic Theory, vol. 2(3-4), pages 217-239.
  2. 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).
  3. Sbordone, Argia M, 1997. "Interpreting the Procyclical Productivity of Manufacturing Sectors: External Effects or Labor Hoarding?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 26-45, February.
  4. Roger E.A. Farmer & Jang Ting Guo, 1992. "Real Business Cycles and the Animal Spirits Hypothesis," UCLA Economics Working Papers 680, UCLA Department of Economics.
  5. Susumu Imai & Michael P. Keane, 2004. "Intertemporal Labor Supply and Human Capital Accumulation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 601-641, 05.
  6. Chris Papageorgiou, 2003. "Distinguishing Between the Effects of Primary and Post-primary Education on Economic Growth," Review of Development Economics, Wiley Blackwell, vol. 7(4), pages 622-635, November.
  7. Benhabib, Jess & Farmer, Roger E A, 1996. "Indeterminacy and Sector-specific Externalities," CEPR Discussion Papers 1403, C.E.P.R. Discussion Papers.
  8. Bennett, R.L. & Farmer, R.E.A., 1999. "Indeterminacy with Non-Separable Utility," Economics Working Papers eco99/34, European University Institute.
  9. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  10. Roberto Perli, . "Indeterminacy, Home Production, and the Business Cycle: a Calibrated Analysis," CARESS Working Papres 97-4, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
  11. Benhabib, J. & Farmer, R.E.A, 1991. "Indeterminacy and Increasing Returns," Papers 165, Cambridge - Risk, Information & Quantity Signals.
  12. Patrick-Antoine Pintus, 2009. "Local Determinacy with Non-separable Utility," Working Papers halshs-00409585, HAL.
  13. Miguel Jimenez & Domenico Marchetti, 2002. "Interpreting the procyclical productivity of manufacturing sectors: can we really rule out external effects?," Applied Economics, Taylor & Francis Journals, vol. 34(7), pages 805-817.
  14. Judith Hellerstein & David Neumark, 2004. "Production Function and Wage Equation Estimation with Heterogenous Labor: Evidence from a New Matched Employer-Employee Dataset," Working Papers 04-05, Center for Economic Studies, U.S. Census Bureau.
  15. Jinill Kim, 1997. "Three sources of increasing returns to scale," Finance and Economics Discussion Series 1997-18, Board of Governors of the Federal Reserve System (U.S.).
  16. Roger E. A. Farmer, 1999. "Macroeconomics of Self-fulfilling Prophecies, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062038, June.
  17. Guo, Jang-Ting & Harrison, Sharon G., 2001. "Indeterminacy with capital utilization and sector-specific externalities," Economics Letters, Elsevier, vol. 72(3), pages 355-360, September.
  18. Jang-Ting Guo & Kevin J. Lansing, 2007. "Maintenance expenditures and indeterminacy under increasing returns to scale," International Journal of Economic Theory, The International Society for Economic Theory, vol. 3(2), pages 147-158.
  19. Wen, Yi, 1998. "Capacity Utilization under Increasing Returns to Scale," Journal of Economic Theory, Elsevier, vol. 81(1), pages 7-36, July.
  20. 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.
  21. Francesco Busato & Bruno Chiarini, 2004. "Market and underground activities in a two-sector dynamic equilibrium model," Economic Theory, Springer, vol. 23(4), pages 831-861, May.
  22. Weder, Mark, 2003. "On the plausibility of sunspot equilibria," Research in Economics, Elsevier, vol. 57(1), pages 65-81, March.
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