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Market distortions and local indeterminacy: a general approach

Author

Listed:
  • 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)

  • Thomas Seegmuller

    () (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - CNRS - Centre National de la Recherche Scientifique - ECM - Ecole Centrale de Marseille)

Abstract

We provide a methodology to study the role of market distortions on the emergence of indeterminacy and bifurcations. Most of the specific market imperfections considered in the related literature are particular cases of our framework. Comparing them we obtain several equivalence results in terms of local dynamic properties, highlighting the main chanels and classes of distortions responsible for indeterminacy. Our methodolgy consists in introducing general specifications for the elasticities of the crucial functions defining the aggregate equilibrium dynamics of the model. This allows us to study how market distortions influence the range of values for the elasticity of inputs substitution under which local indeterminacy and bifurcations occur. Applying this methodology to the Woodford (1986) framework we find that distortions in the capital market, per se, do not play a major role. We further show that, for empirically plausible values of elasticity of substitution between inputs, indeterminacy requires a minimal degree of distortions. This degree seems to be high under output market distortions, while with labor market distortions the required degree is empirically plausible.

Suggested Citation

  • Teresa Lloyd-Braga & Leonor Modesto & Thomas Seegmuller, 2011. "Market distortions and local indeterminacy: a general approach," Working Papers halshs-00576582, HAL.
  • Handle: RePEc:hal:wpaper:halshs-00576582 Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00576582
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    References listed on IDEAS

    as
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    Cited by:

    1. Nishimura, Kazuo & Seegmuller, Thomas & Venditti, Alain, 2015. "Fiscal policy, debt constraint and expectations-driven volatility," Journal of Mathematical Economics, Elsevier, vol. 61(C), pages 305-316.
    2. Marta Aloi & Teresa Lloyd-Braga & Manuel Leite-Monteiro, 2017. "Welfare benefit reforms and employment," Discussion Papers 2017/02, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    3. Dos Santos Ferreira, Rodolphe & Lloyd-Braga, Teresa & Modesto, Leonor, 2014. "Employment Dynamics and Redistributive Policies under Workers' Social Norms," IZA Discussion Papers 7888, Institute for the Study of Labor (IZA).
    4. Dos Santos Ferreira, Rodolphe & Lloyd-Braga, Teresa & Modesto, Leonor, 2015. "The destabilizing effects of the social norm to work under a social security system," Mathematical Social Sciences, Elsevier, vol. 76(C), pages 64-72.

    More about this item

    Keywords

    Indeterminacy; endogenous fluctuations; market imperfections; externalities; imperfect competition; taxation;

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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