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Indeterminacy, bifurcations and unemployment fluctuations

  • Frédéric Dufourt


    (BETA - Bureau d'économie théorique et appliquée - CNRS - Université Nancy 2 - Université de Strasbourg)

  • 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
Date of revision:
Publication status: Published in Macroeconomic Dynamics, Cambridge University Press (CUP), 2008, 12 (Supplement 1), pp.75-89
Handle: RePEc:hal:journl:halshs-00815504
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  1. 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.).
  2. Benhabib, Jess & Farmer, Roger E.A., 1991. "Indeterminacy and Increasing Returns," Working Papers 91-59, C.V. Starr Center for Applied Economics, New York University.
  3. G, Cazzavillan & T, Lloyd-Braga & P, A, Pintus, 1997. "Multiple Steady States and Endogenous Fluctuations with Increasing Returns to Scale in Production," Working Papers 97-29, Centre de Recherche en Economie et Statistique.
  4. Jean-Michel Grandmont & P, A, Pintus & R, De Vilder, 1997. "Capital-Labor Substitution and Competitive Nonlinear Endogenous Business Cycles," Working Papers 97-28, Centre de Recherche en Economie et Statistique.
  5. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
  6. 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.
  7. Stephanie Schmitt-Grohe & Martin Uribe, 1995. "Balanced-budget rules, distortionary taxes, and aggregate instability," Finance and Economics Discussion Series 95-44, Board of Governors of the Federal Reserve System (U.S.).
  8. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
  9. Thomas Seegmuller & Leonor Modesto & Teresa Lloyd-Braga, 2008. "Market Imperfections and Endogenous Fluctuations," 2008 Meeting Papers 739, Society for Economic Dynamics.
  10. 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.
  11. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
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