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Global indeterminacy in locally determinate RBC models

Listed author(s):
  • Tarek Coury
  • Yi Wen

We investigate the global dynamics of RBC models with production externalities. We confirm that purely local analysis does not tell the full story. With externalities smaller than required for local indeterminacy, local analysis shows the steady state to be a saddle, implying a unique equilibrium. But global analysis reveals the steady state is surrounded by stable deterministic cycles. Our analysis suggests that indeterminacy is more robust than previously realized, and the results strengthen the view that caution should be exercised when linearized versions of this class of RBC models are used in applied work.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2007-029.

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Date of creation: 2007
Handle: RePEc:fip:fedlwp:2007-029
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