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Indeterminacy and Sunspots in Two-Sector RBC Models with Generalized No-Income-Effect Preferences

Listed author(s):
  • Frédéric Dufourt

    ()

    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille 2 - Université Paul Cézanne - Aix-Marseille 3 - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique, IUF - Institut Universitaire de France - M.E.N.E.S.R. - Ministère de l'Éducation nationale, de l’Enseignement supérieur et de la Recherche)

  • Kazuo Nishimura

    (KIER, Kyoto University - Kyoto University [Kyoto], RIEB, Kobe University - Kobe University)

  • Alain Venditti

    ()

    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille 2 - Université Paul Cézanne - Aix-Marseille 3 - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique, EDHEC - EDHEC Business School)

We analyze sunspot-driven fluctuations in the standard two-sector RBC model with moderate increasing returns to scale and generalized no-income-effect preferences à la Greenwood, Hercovitz and Huffman [13]. We provide a detailed theoretical analysis enabling us to derive relevant bifurcation loci and to characterize the steady-state local stability properties as a function of various structural parameters. We show that local indeterminacy occurs through flip and Hopf bifurcations for a large set of values for the elasticity of intertemporal substitution in consumption, provided that the labor supply is sufficiently inelastic. Finally, we provide a detailed quantitative analysis of the model. Computing, on a quarterly basis, a new set of empirical moments related to two broadly defined consumption and investment sectors, we are able to identify, among the set of admissible calibrations consistent with sunspot equilibria, the ones that provide the best fit of the data. The model properly calibrated solves several empirical puzzles traditionally associated with two-sector RBC models.

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Paper provided by HAL in its series Working Papers with number halshs-01131411.

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Date of creation: Mar 2015
Handle: RePEc:hal:wpaper:halshs-01131411
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-01131411
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  1. Guo, Jang-Ting & Harrison, Sharon G., 2010. "Indeterminacy with no-income-effect preferences and sector-specific externalities," Journal of Economic Theory, Elsevier, vol. 145(1), pages 287-300, January.
  2. Benhabib, Jess & Nishimura, Kazuo, 1998. "Indeterminacy and Sunspots with Constant Returns," Journal of Economic Theory, Elsevier, vol. 81(1), pages 58-96, July.
  3. Benhabib Jess & Farmer Roger E. A., 1994. "Indeterminacy and Increasing Returns," Journal of Economic Theory, Elsevier, vol. 63(1), pages 19-41, June.
  4. Baxter, Marianne, 1996. "Are Consumer Durables Important for Business Cycles?," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 147-155, February.
  5. Grandmont, Jean-Michel, 2008. "Nonlinear difference equations, bifurcations and chaos: An introduction," Research in Economics, Elsevier, vol. 62(3), pages 122-177, September.
  6. Benhabib, Jess & Farmer, Roger E. A., 1996. "Indeterminacy and sector-specific externalities," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 421-443, June.
  7. Jean-Philippe Garnier & Kazuo Nishimura & Alain Venditti, 2007. "Intertemporal substitution in consumption, labor supply elasticity and sunspot fluctuations in continuous-time models," International Journal of Economic Theory, The International Society for Economic Theory, vol. 3(4), pages 235-259.
  8. Jaimovich, Nir, 2008. "Income effects and indeterminacy in a calibrated one-sector growth model," Journal of Economic Theory, Elsevier, vol. 143(1), pages 610-623, November.
  9. Basu, Susanto & Fernald, John G, 1997. "Returns to Scale in U.S. Production: Estimates and Implications," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 249-283, April.
  10. Casey B. Mulligan, 2002. "Capital, Interest, and Aggregate Intertemporal Substitution," NBER Working Papers 9373, National Bureau of Economic Research, Inc.
  11. Rogerson, Richard & Wallenius, Johanna, 2009. "Micro and macro elasticities in a life cycle model with taxes," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2277-2292, November.
  12. Edward C. Prescott & Johanna Wallenius, 2012. "Aggregate labor supply," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Oct.
  13. 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.
  14. Jonathan Gruber, 2013. "A Tax-Based Estimate of the Elasticity of Intertemporal Substitution," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 3(01), pages 1-20.
  15. Sharon G. Harrison, 2003. "Returns to Scale and Externalities in the Consumption and Investment Sectors," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 963-976, October.
  16. 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.
  17. Nishimura, Kazuo & Venditti, Alain, 2010. "Indeterminacy and expectation-driven fluctuations with non-separable preferences," Mathematical Social Sciences, Elsevier, vol. 60(1), pages 46-56, July.
  18. Harrison, Sharon G., 2001. "Indeterminacy in a model with sector-specific externalities," Journal of Economic Dynamics and Control, Elsevier, vol. 25(5), pages 747-764, May.
  19. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-417, June.
  20. Annette Vissing-Jørgensen & Orazio P. Attanasio, 2003. "Stock-Market Participation, Intertemporal Substitution, and Risk-Aversion," American Economic Review, American Economic Association, vol. 93(2), pages 383-391, May.
  21. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April.
  22. Meng, Qinglai & Yip, Chong Kee, 2008. "On indeterminacy in one-sector models of the business cycle with factor-generated externalities," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 97-110, March.
  23. Nishimura, Kazuo & Venditti, Alain, 2007. "Indeterminacy in discrete-time infinite-horizon models with non-linear utility and endogenous labor," Journal of Mathematical Economics, Elsevier, vol. 43(3-4), pages 446-476, April.
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