Indeterminacy and sector-specific externalities

Jess Benhabib, Roger E.A. Farmer

    Research output: Contribution to journalArticle

    Abstract

    We introduce mild increasing returns-to-scale into a version of the Real Business Cycle model. These increasing returns-to-scale occur as a consequence of sector-specific externalities, that is externalities where the output of the consumption and investment sectors have external effects on the output of firms within their own sector. Keeping the production technologies for both sectors identical for expositional simplicity, we show that indeterminacy can easily occur for parameter values typically used in the real business cycle literature, and in contrast to some earlier literature on indeterminacies, for externalities mild enough so that labor demand curves are downward-sloping.

    Original languageEnglish (US)
    Pages (from-to)421-443
    Number of pages23
    JournalJournal of Monetary Economics
    Volume37
    Issue number3
    DOIs
    StatePublished - Jun 1996

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    Keywords

    • Indeterminacy
    • Real business cycles
    • Sunspots

    ASJC Scopus subject areas

    • Finance
    • Economics and Econometrics

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