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Indeterminacy, bifurcations and unemployment fluctuations

  • Frédéric Dufourt

    ()

    (BETA - Bureau d'économie théorique et appliquée - CNRS : UMR7522 - Université de Strasbourg - Université Nancy II)

  • Teresa Lloyd-Braga

    ()

    (FCEE - Faculdade de Ciencias Economicas e Empresariais - Universidade Catolica Portuguesa)

  • Leonor Modesto

    ()

    (FCEE - Faculdade de Ciencias Economicas e Empresariais - Universidade Catolica Portuguesa)

We incorporate imperfectly insured unemployment in the finance constrained economy proposed by Woodford (1986), by introducing unions and unemployment benefits financed by labor taxation. We show that this simple extension of the Woodford model changes drastically its stability conditions and local dynamics around the steady state. In fact, in contrast to related models in the literature, we find that, under constant returns to scale in production: (i) indeterminacy always prevails in the case of a unitary elasticity of substitution between capital and labor; (ii) flip and Hopf bifurcations occur for empirically credible elasticities of substitution between capital and labor, so that a rich set of dynamics may emerge at "realistic" parameters' values.

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Paper provided by HAL in its series Post-Print with number halshs-00815504.

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Date of creation: 01 Jan 2008
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Publication status: Published, Macroeconomic Dynamics, 2008, 12, Supplement 1, 75-89
Handle: RePEc:hal:journl:halshs-00815504
Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00815504
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  1. Cazzavillan, Guido & Lloyd-Braga, Teresa & Pintus, Patrick, 1996. "Multiple steady states and endogenous fluctuations with increasing returns to scale in production," CEPREMAP Working Papers (Couverture Orange) 9618, CEPREMAP.
  2. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
  3. Thomas Seegmuller & Leonor Modesto & Teresa Lloyd-Braga, 2008. "Market Imperfections and Endogenous Fluctuations," 2008 Meeting Papers 739, Society for Economic Dynamics.
  4. Grandmont, Jean-Michel & Pintus, Patrick & de Vilder, Robin, 1998. "Capital-Labor Substitution and Competitive Nonlinear Endogenous Business Cycles," Journal of Economic Theory, Elsevier, vol. 80(1), pages 14-59, May.
  5. Deaton, A., 1989. "Saving And Liquidity Constraints," Papers 153, Princeton, Woodrow Wilson School - Public and International Affairs.
  6. Jess Benhabib & Roger E.A. Farmer, 1992. "Indeterminacy and Increasing Returns," UCLA Economics Working Papers 646, UCLA Department of Economics.
  7. Lloyd-Braga, Teresa & Modesto, Leonor, 2007. "Indeterminacy in a finance constrained unionized economy," Journal of Mathematical Economics, Elsevier, vol. 43(3-4), pages 347-364, April.
  8. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  9. Duffy, John & Papageorgiou, Chris, 2000. " A Cross-Country Empirical Investigation of the Aggregate Production Function Specification," Journal of Economic Growth, Springer, vol. 5(1), pages 87-120, March.
  10. Schmitt-Grohe, Stephanie & Uribe, Martin, 1997. "Balanced-Budget Rules, Distortionary Taxes, and Aggregate Instability," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 976-1000, October.
  11. Susanto Basu & John G. Fernald, 1996. "Returns to scale in U.S. production: estimates and implications," International Finance Discussion Papers 546, Board of Governors of the Federal Reserve System (U.S.).
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