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Market Imperfections and Endogenous Fluctuations

  • Thomas Seegmuller

    (Paris School of Economics and CNRS)

  • Leonor Modesto

    (Universidade Católica Porttuguesa, FCEE, Lisbon and IZA)

  • Teresa Lloyd-Braga

    (Universidade Católica Portuguesa, FCEE, Lisbon and CEPR)

We provide a methodology to study the role of distortions and market failures on endogenous fluctuations. We extend the well-known Woodford (1986) model to account for market distortions, introducing general specifications for three crucial functions: real rental cost of capital, real wage and workers offer curve. The elasticities of these three functions have a key role on local dynamics and, using them, we are able to identify the several parameters' configurations under which local indeterminacy and bifurcations occur. Most of the market imperfections considered in the related literature become particular cases of our general framework, and by comparing them we show that several types of market distortions are equivalent in terms of the local dynamics, sharing therefore the same indeterminacy mechanisms. We further provide examples of specific distortions leading to new configurations. We also found that indeterminacy, with arbitrarily small levels of distortions, require conditions similar to those founded in the standard Ramsey and OLG economies.

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Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 739.

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Date of creation: 2008
Date of revision:
Handle: RePEc:red:sed008:739
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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  1. Seegmuller, Thomas, 2008. "Taste For Variety And Endogenous Fluctuations In A Monopolistic Competition Model," Macroeconomic Dynamics, Cambridge University Press, vol. 12(04), pages 561-577, September.
  2. Jaime Alonso-Carrera & Jordi Caballé & Xavier Raurich, 2005. "Can consumption spillovers be a source of equilibrium indeterminacy?," 2005 Meeting Papers 362, Society for Economic Dynamics.
  3. 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.
  4. Weder, Mark, 1997. "Animal spirits, technology shocks and the business cycle," SFB 373 Discussion Papers 1997,61, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  5. 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.
  6. Chryssi Giannitsarou, 2004. "Balanced Budget Rules and Aggregate Instability: The Role of Consumption Taxes," Econometric Society 2004 North American Summer Meetings 173, Econometric Society.
  7. GRANDMONT, Jean-Michel & PINTUS, Patrick & de VILDER, Robin, 1997. "Capital-labor substitution and competitive nonlinear endogenous business cycles," CORE Discussion Papers 1997087, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Kuhry, Yves, 2001. "Endogenous fluctuations in a cournotian monopolistic competition model with free entry and market power variability," Research in Economics, Elsevier, vol. 55(4), pages 389-412, December.
  9. Thomas Seegmuller, 2009. "Capital-Labour Substitution And Endogenous Fluctuations: A Monopolistic Competition Approach With Variable Markup," The Japanese Economic Review, Japanese Economic Association, vol. 60(3), pages 301-319.
  10. Teresa Lloyd-Braga & Leonor Modesto & Thomas Seegmuller, 2008. "Tax Rate Variability and Public Spending as Sources of Indeterminacy," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00194395, HAL.
  11. 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.
  12. Frédéric Dufourt & Teresa Lloyd-Braga & Leonor Modesto, 2008. "Indeterminacy, bifurcations and unemployment fluctuations," Post-Print halshs-00815504, HAL.
  13. Mark Weder, 2000. "Consumption Externalities, Production Externalities and Indeterminacy," Metroeconomica, Wiley Blackwell, vol. 51(4), pages 435-453, November.
  14. Lloyd-Braga, Teresa & Nourry, Carine & Venditti, Alain, 2007. "Indeterminacy in dynamic models: When Diamond meets Ramsey," Journal of Economic Theory, Elsevier, vol. 134(1), pages 513-536, May.
  15. d’ASPREMONT, Claude & DOS SANTOS FERREIRA, Rodolphe & GERARD-VARET, Louis-André, 2000. "Endogenous business cycles and business formation with strategic investment," CORE Discussion Papers 2000053, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  16. Benassy, Jean-Pascal, 1996. "Taste for variety and optimum production patterns in monopolistic competition," Economics Letters, Elsevier, vol. 52(1), pages 41-47, July.
  17. Harald Uhlig & Lars Ljungqvist, 2000. "Tax Policy and Aggregate Demand Management under Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 90(3), pages 356-366, June.
  18. Cazzavillan, Guido, 2001. "Indeterminacy and Endogenous Fluctuations with Arbitrarily Small Externalities," Journal of Economic Theory, Elsevier, vol. 101(1), pages 133-157, November.
  19. Dos Santos Ferreira, Rodolphe & Lloyd-Braga, Teresa, 2005. "Non-linear endogenous fluctuations with free entry and variable markups," Journal of Economic Dynamics and Control, Elsevier, vol. 29(5), pages 847-871, May.
  20. Jang-Ting Guo & Kevin J. Lansing, 1997. "Indeterminacy and stabilization policy," Working Paper 9708, Federal Reserve Bank of Cleveland.
  21. Patrick Pintus, 2006. "Indeterminacy with almost constant returns to scale: capital-labor substitution matters," Economic Theory, Springer, vol. 28(3), pages 633-649, 08.
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