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Animal spirits in cash-in-advance economies

  • Stefano BOSI

    (EPEE, University of Evry)

  • Frédéric DUFOURT

    (BETA-theme, University Louis Pasteur)

  • Francesco MAGRIS

    (EPEE, University of Evry)

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.

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Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (REL - Recherches Economiques de Louvain) with number 2007021.

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Length: 22
Date of creation: 01 Jun 2007
Date of revision:
Handle: RePEc:ctl:louvre:2007021
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