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Indeterminacy in a Cash-in-Advance Two-Sector Economy

Author

Listed:
  • Stefano Bosi

    (EPEE, Université d’Evry)

  • Francesco Magris

    (EPEE, Université d’Evry)

  • Alain Venditti

    (CNRS - GREQAM)

Abstract

This paper aims to fill some theoretical gaps existing in literature between monetary indeterminate economies and multisector models. We carry out such a purpose by considering a two-sector infinite horizon economy with a partial cash-in-advance constraint on consumption expenditures. This formulation allows to consider a steady state velocity of money which is strictly greater than one and thus provides a more plausible framework than the standard formulation in which all the consumption purchases are paid cash. We prove that the steady state is bound to be indeterminate when the amplitude of the liquidity constraint is low enough and that a capital intensive investment good or a strongly capital intensive consumption good improve considerably the scope for indeterminacy. As a consequence, we show that without any restriction on the elasticity of intertemporal substitution in consumption, multiple equilibria may occur if the velocity of money is greater than a critical bound which is compatible with empirial estimates.

Suggested Citation

  • Stefano Bosi & Francesco Magris & Alain Venditti, 2003. "Indeterminacy in a Cash-in-Advance Two-Sector Economy," Documents de recherche 03-04, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
  • Handle: RePEc:eve:wpaper:03-04
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    References listed on IDEAS

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    Cited by:

    1. Thomas Seegmuller, 2005. "Steady state analysis and endogenous fluctuations in a finance constrained model," Cahiers de la Maison des Sciences Economiques v05029, Université Panthéon-Sorbonne (Paris 1).
    2. Bosi, Stefano & Magris, Francesco & Venditti, Alain, 2005. "Competitive equilibrium cycles with endogenous labor," Journal of Mathematical Economics, Elsevier, vol. 41(3), pages 325-349, April.

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    More about this item

    Keywords

    CIA constraint; two-sector models; indeterminacy; sunspot equilibria;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • 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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