On Indeterminacy in Two Sector Models with Factor Market Distortions: The Importance of VIPIRS
Previous literature has shown that local indeterminacy and local instability can arise in two-sector models when factor market distortions create a divergence between capital intensity ranking of the sectors on a physical basis and on a value basis. We identify a previously unnoticed source of indeterminacy that arises when there are value intensity - physical intensity reversals (VIPIRs), which is that there is a range of the phase plane in which there are 3 static equilibria (one with incomplete specialization and one with complete specialization in each of the respective goods). We show how this multiplicity of equilibria can be used to construct compound pathsin which the economy switches between production patterns over time. We show that in an open economy model with VIPIRs, there will exist compound paths that reach the steady in finite time. We also establish conditions for the existence of cyclical equilibria that alternate forever between specialization in the consumption and specialization in the investment good. Consideration of the compound paths can expand the range of parameter values for which the economy has a multiplicity of equilibrium paths and can generate paths to the steady in examples where the steady state is locally unstable.
|Date of creation:||Dec 2006|
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- Eric W. Bond & Kathleen Trask & Ping Wang, 2003.
"Factor Accumulation and Trade: Dynamic Comparative Advantage with Endogenous Physical and Human Capital,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(3), pages 1041-1060, 08.
- Eric W. Bond & Kathleen Trask & Ping Wang, 1996. "Factor Accumulation and Trade: Dynamic Comparative Advantage with Endogenous Physical and Human Capital," Vanderbilt University Department of Economics Working Papers 0031, Vanderbilt University Department of Economics, revised Aug 2000.
- Jess Benhabib & Qinglai Meng & Kazuo Nishimura, 2000. "Indeterminacy under Constant Returns to Scale in Multisector Economies," Econometrica, Econometric Society, vol. 68(6), pages 1541-1548, November.
- Benhabib, J. & Meng, Q. & Nishimura, K., 1999. "Indeterminacy Under Constant Returns to Scale in Multisector Economies," Working Papers 99-17, C.V. Starr Center for Applied Economics, New York University.
- Bond, Eric W. & Wang, Ping & Yip, Chong K., 1996. "A General Two-Sector Model of Endogenous Growth with Human and Physical Capital: Balanced Growth and Transitional Dynamics," Journal of Economic Theory, Elsevier, vol. 68(1), pages 149-173, January.
- Bond, Eric W. & Wang, Ping & Yip, Chong K., 1993. "A general two-sector model of endogenous growth with human and physical capital: balanced growth and transitional dynamics," Working Papers 9324, Federal Reserve Bank of Dallas.
- Meng, Qinglai & Velasco, Andres, 2004. "Market imperfections and the instability of open economies," Journal of International Economics, Elsevier, vol. 64(2), pages 503-519, December.
- Jones, Ronald W, 1971. "Distortions in Factor Markets and the General Equilibrium Model of Production," Journal of Political Economy, University of Chicago Press, vol. 79(3), pages 437-459, May-June.
- Ronald W. Jones, 1965. "The Structure of Simple General Equilibrium Models," Journal of Political Economy, University of Chicago Press, vol. 73, pages 557-557.
- Magee, Stephen P, 1973. "Factor Market Distortions, Production, and Trade: A Survey," Oxford Economic Papers, Oxford University Press, vol. 25(1), pages 1-43, March.
- Neary, J Peter, 1978. "Dynamic Stability and the Theory of Factor-Market Distortions," American Economic Review, American Economic Association, vol. 68(4), pages 671-682, September. Full references (including those not matched with items on IDEAS)
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