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Animal spirits in cash-in-advance economies

Author

Listed:
  • Stefano BOSI

    (EPEE, University of Evry)

  • Frédéric DUFOURT

    (BETA-theme, University Louis Pasteur)

  • Francesco MAGRIS

    (EPEE, University of Evry)

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.

Suggested Citation

  • Stefano BOSI & Frédéric DUFOURT & Francesco MAGRIS, 2007. "Animal spirits in cash-in-advance economies," Discussion Papers (REL - Recherches Economiques de Louvain) 2007021, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  • Handle: RePEc:ctl:louvre:2007021
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    File URL: http://sites.uclouvain.be/econ/DP/REL/2007021.pdf
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    References listed on IDEAS

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    1. Mongin, P., 1998. "Does Optimization Imply Rationality?," Papers 9817, Paris X - Nanterre, U.F.R. de Sc. Ec. Gest. Maths Infor..
    2. Marc Fleurbaey & Cyrille Hagneré & Michel Martinez & Alain Trannoy, 1999. "Les minima sociaux en France : entre compensation et responsabilité," Économie et Prévision, Programme National Persée, pages 1-23.
    3. Philippe Mongin, 2003. "L'axiomatisation et les théories économiques," Revue économique, Presses de Sciences-Po, vol. 54(1), pages 99-138.
    4. Machlup, Fritz, 1978. "Methodology of Economics and Other Social Sciences," Elsevier Monographs, Elsevier, edition 1, number 9780124645509 edited by Shell, Karl.
    5. Debreu, Gerard, 1993. "Existence of competitive equilibrium," Handbook of Mathematical Economics,in: K. J. Arrow & M.D. Intriligator (ed.), Handbook of Mathematical Economics, edition 4, volume 2, chapter 15, pages 697-743 Elsevier.
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    Cited by:

    1. Lehmann, Etienne & Parmentier, Alexis & Van Der Linden, Bruno, 2011. "Optimal income taxation with endogenous participation and search unemployment," Journal of Public Economics, Elsevier, vol. 95(11), pages 1523-1537.
    2. Barbar, Riham & Bosi, Stefano, 2010. "Collaterals and macroeconomic volatility," Research in Economics, Elsevier, pages 146-161.

    More about this item

    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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