Indeterminacy in a small open economy with endogenous labor supply

Abstract

We establish conditions under which indeterminacy can occur in a small open economy business cycle model with endogenous labor supply. Indeterminacy requires small externalities in technologies with social constant returns to scale, independently of the intertemporal elasticities in both consumption and labor. Copyright Springer-Verlag Berlin Heidelberg 2003Keywords and Phrases: Indeterminacy, Small open economy, Business cycles., JEL Classification Numbers: E32, F12, F4.,

Interest rate rules, endogenous cycles, and chaotic dynamics in open economies

“…On one hand, relative to the global analyses on closed economy models, we show that trade openness considerably widens the range of values of the risk aversion parameter under which cycles and chaos can arise. In this regard, our results are in the same spirit as those from Weder (2001) and Meng and Velasco (2003) of the RBC literature on production externalities: openness makes it easier to obtain expectations-driven fluctuations. On the other hand, relative to the local analysis on open economy models, we show that rules that imply local determinacy can still lead to global indeterminacy by inducing cyclical and chaotic dynamics.…”

Does utility curvature matter for indeterminacy?

“…However, indeterminacy does occur with this utility function in a two-sector model. See Meng and Velasco (2003) for details. this relationship, either.…”

“…11 10 I thank the referee on pointing out this qualification of my results. 11 Papers using this functional form include Hercowitz and Sampson (1991), Mendoza (1991), King and Wolman (1999), and Meng and Velasco (2003).…”

“…Examples include variable markups as inGali (1994), capacity utilization as inWen (1998), and investment adjustment costs as inKim (2003).3 See Lahiri(2001),Wen (2001), andMeng and Velasco (2003), as well as the above-mentioned papers, for more on such intuitive explanations for indeterminacy.4 Benhabib and Farmer (1994) presented two economic environments that are consistent with increasing returns. This note adopts the model with production externalities.…”

Expectation‐driven fluctuations and welfare loss under free trade in two‐country models

“…We consider a two-sector two-country model in which consumption and investment goods are produced with Cobb-Douglas technologies augmented to include sector-specific externalities and we focus on a market integration based on international trade of both goods. To characterize the stability properties of free-trade equilibrium paths, we assume decreasing social returns to scale in the consumption good sector of each 1 See, for instance, Benhabib and Nishimura (1998), Meng and Velasco (2003) and Weder (2001). 2 Considering a formulation with Cobb-Douglas technologies, Nishimura, Venditti, and Yano (2006) provide factor intensities conditions for this result to hold.…”