IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Dynamics of externalities: a second-order perspective

  • Yi Wen
  • Huabin Wu
Registered author(s):

We show that increasing returns to scale (due to production externalities) may induce a strong degree of asymmetric income effects and nonlinear dynamics that are not fully appreciated by linear approximation methods. For example, hump-shaped output dynamics can emerge even when externalities are significantly below the threshold level required for indeterminacy, and output expansion tends to be smoother and longer while contraction tends to be deeper but shorter-lived. Thus, mild degree of externalities without triggering indeterminacy can potentially explain the asymmetric property of the business cycle and the hump-shaped output dynamics found in the empirical literature. Our results also suggest exercising caution when using linear approximation methods to analyze the local dynamics of models with market frictions and non-convexities.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://research.stlouisfed.org/wp/2008/2008-044.pdf
Download Restriction: no

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2008-044.

as
in new window

Length:
Date of creation: 2008
Date of revision:
Handle: RePEc:fip:fedlwp:2008-044
Contact details of provider: Postal:
P.O. Box 442, St. Louis, MO 63166

Fax: (314)444-8753
Web page: http://www.stlouisfed.org/

More information through EDIRC

Order Information: Email:


References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Chang-Jin Kim & Jeremy Piger, 2000. "Common Stochastic Trends, Common Cycles, and Asymmetry in Economic Fluctuations," Working Papers 0021, University of Washington, Department of Economics.
  2. Jesus Fernandez-Villaverde & Juan F. Rubio-Ramirez & Manuel Santos, 2004. "Convergence Properties of the Likelihood of Computed Dynamic Models," PIER Working Paper Archive 04-034, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  3. Luís Aguiar-Conraria & Yi Wen, 2007. "Understanding the Large Negative Impact of Oil Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 925-944, 06.
  4. Stephanie Schmitt-Grohe, 1998. "Endogenous business cycles and the dynamics of output, hours, and consumption," Finance and Economics Discussion Series 1998-19, Board of Governors of the Federal Reserve System (U.S.).
  5. Alisdair McKay & Ricardo Reis, 2006. "The Brevity and Violence of Contractions and Expansions," NBER Working Papers 12400, National Bureau of Economic Research, Inc.
  6. Tarek Coury & Yi Wen, 2007. "Global indeterminacy in locally determinate RBC models," Working Papers 2007-029, Federal Reserve Bank of St. Louis.
  7. Timothy Cogley & James M. Nason, 1993. "Output dynamics in real business cycle models," Working Papers in Applied Economic Theory 93-10, Federal Reserve Bank of San Francisco.
  8. Neftci, Salih N, 1984. "Are Economic Time Series Asymmetric over the Business Cycle?," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 307-28, April.
  9. Hamilton, James D., 2003. "What is an oil shock?," Journal of Econometrics, Elsevier, vol. 113(2), pages 363-398, April.
  10. Eric T. Swanson & Gary S. Anderson & Andrew T. Levin, 2006. "Higher-order perturbation solutions to dynamic, discrete-time rational expectations models," Working Paper Series 2006-01, Federal Reserve Bank of San Francisco.
  11. Lombardo, Giovanni & Sutherland, Alan, 2007. "Computing second-order-accurate solutions for rational expectation models using linear solution methods," Journal of Economic Dynamics and Control, Elsevier, vol. 31(2), pages 515-530, February.
  12. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Solving dynamic general equilibrium models using a second-order approximation to the policy function," Journal of Economic Dynamics and Control, Elsevier, vol. 28(4), pages 755-775, January.
  13. Collard, Fabrice & Juillard, Michel, 1999. "Accuracy of stochastic perturbuation methods: the case of asset pricing models," CEPREMAP Working Papers (Couverture Orange) 9922, CEPREMAP.
  14. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  15. Farmer Roger E. A. & Guo Jang-Ting, 1994. "Real Business Cycles and the Animal Spirits Hypothesis," Journal of Economic Theory, Elsevier, vol. 63(1), pages 42-72, June.
  16. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  17. Tarek Coury & Yi Wen, 2009. "Global indeterminacy in locally determinate real business cycle models," International Journal of Economic Theory, The International Society for Economic Theory, vol. 5(1), pages 49-60.
  18. Jess Benhabib & Roger E.A. Farmer, 1992. "Indeterminacy and Increasing Returns," UCLA Economics Working Papers 646, UCLA Department of Economics.
  19. Zhigang Feng & Jianjun Miao & Adrian Peralta-Alva & Manuel S. Santos, . "Numerical Simulation of Nonoptimal Dynamic Equilibrium Models," Boston University - Department of Economics - Working Papers Series wp2009-013, Boston University - Department of Economics.
  20. Sichel, D.E., 1988. "Business Cycle Asymmetry: A Deeper Look," Papers 85, Princeton, Department of Economics - Financial Research Center.
  21. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  22. Wen, Yi, 1998. "Capacity Utilization under Increasing Returns to Scale," Journal of Economic Theory, Elsevier, vol. 81(1), pages 7-36, July.
  23. Mork, Knut Anton, 1989. "Oil and Macroeconomy When Prices Go Up and Down: An Extension of Hamilton's Results," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 740-44, June.
  24. Benhabib, Jess & Wen, Yi, 2001. "Indeterminacy, Aggregate Demand, and the Real Business Cycle," Working Papers 01-09r, Cornell University, Center for Analytic Economics.
  25. Daniel Ackerberg & John Geweke & Jinyong Hahn, 2009. "Comments on "Convergence Properties of the Likelihood of Computed Dynamic Models"," Econometrica, Econometric Society, vol. 77(6), pages 2009-2017, November.
  26. Jinill Kim & Sunghyun Kim & Ernst Schaumburg & Christopher A. Sims, 2003. "Calculating and Using Second Order Accurate Solutions of Discrete Time," Levine's Bibliography 666156000000000284, UCLA Department of Economics.
  27. Russell Cooper & Alok Johri, 1996. "Dynamic Complementarities: A Quantitative Analysis," NBER Working Papers 5691, National Bureau of Economic Research, Inc.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:fip:fedlwp:2008-044. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anna Xiao)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.