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Market distortions and local indeterminacy: A general approach

Teresa Lloyd-Braga, +2 more
- 01 May 2014 - 
- Vol. 151, pp 216-247
TLDR
In this paper, the role of market distortions on the emergence of indeterminacy and bifurcations is investigated, and it is shown that distortions in the capital market do not play a major role.
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This article is published in Journal of Economic Theory.The article was published on 2014-05-01 and is currently open access. It has received 7 citations till now. The article focuses on the topics: Indeterminacy (literature) & Elasticity of substitution.

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Citations
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Fiscal policy, debt constraint and expectations-driven volatility

TL;DR: In this paper, the authors show that the intertemporal budget constraint of the government can be a fundamental source of indeterminacy, and therefore, of expectations-driven fluctuations, and that this is promoted by a larger ratio of debt over GDP.
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Comparing recursive equilibrium in economies with dynamic complementarities and indeterminacy

TL;DR: In this article, a multistep monotone map approach is developed to characterize minimal state-space recursive equilibrium for a broad class of infinite horizon dynamic general equilibrium models with positive externalities, dynamic complementarities, public policy, equilibrium indeterminacy, and sunspots.
Journal ArticleDOI

The destabilizing effects of the social norm to work under a social security system

TL;DR: It is found that a strong social norm to work destabilizes conventional wisdom by reversing the negative effects of social security on employment, and destabilizes the economy by facilitating the emergence of endogenous fluctuations.
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Stabilizing and destabilizing mechanisms: A new perspective to understand business cycles

TL;DR: In this article, the authors build a macro-dynamic model with investment and price as the core macroeconomic variables and show that the interaction between the stabilization mechanism (price adjustment) and the destabilization mechanism (investment adjustment) generates fluctuations and cycles.
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Investissement stratégique et fluctuations endogènes

TL;DR: In this paper, an economie multi-branches a generations imbriquees, ou les entreprises de chaque branche vivent deux periodes, investissant strategiquement en premiere and produisant sous regime de concurrence cournotienne en seconde periode.
References
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Returns to Scale in U.S. Production: Estimates and Implications

TL;DR: In this article, the authors discuss implications of heterogencity for macroeconomic modeling: a one-sector macroeconomic model that ignores heterogeneity may sometimes require firm level parameters, but at other times the model may require the “biased” aggregate parameters.
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Effective tax rates in macroeconomics: Cross-country estimates of tax rates on factor incomes and consumption

TL;DR: In this article, the authors proposed a method for computing tax rates using national accounts and revenue statistics. And they constructed time series of tax rates for large industrial countries, identifying the revenue raised by different taxes at the general government level and defining aggregate measures of the corresponding tax bases.
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Indeterminacy and Increasing Returns

TL;DR: In this article, the authors investigate properties of the one-sector growth model with increasing returns under two organizational structures capable of reconciling the existence of aggregate increasing returns with competitive behavior by firms.
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Business cycle accounting

TL;DR: In this article, the authors propose a simple method to help researchers develop quantitative models of economic fluctuations based on the insight that many models are equivalent to a prototype growth model with time-varying wedges which resemble productivity, labor and investment taxes, and government consumption.
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Keeping Up with the Joneses: Consumption Externalities, Portfolio Choice, and Asset Prices

TL;DR: In this article, the authors studied the implications for optimal portfolio decisions and equilibrium asset prices of the hypothesis that agents care about other agents' consumption level (in addition to their own) in two settings: a one-period CAPM model and a multi-period asset pricing model.
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Frequently Asked Questions (14)
Q1. What have the authors contributed in "Market distortions and local indeterminacy: a general approach" ?

The authors provide a general methodology to study the role of market distortions on local indeterminacy and bifurcations. 

Empirical analysis on this issue is therefore an important direction for further research. 56 A possible explanation for these results may be linked to the fact that future expectations, which open the room for fluctuations driven by selffulfilling expectations, only affect the current decisions of consumers/workers, thus rendering distortions that affect the intertemporal trade-off of consumers/workers more important than those affecting the capital accumulation equation. Although some works have already considered some of these aspects,58 further research on this issue is welcome. Second, although the authors only discuss local deterministic indeterminacy and cycles, they may be able to construct stochastic sunspot cycles along indeterminacy and bifurcations 56Some recent works confirm the importance of labor market imperfections in explaining real business cycles data. 

the occurrence of indeterminacy and bifurcations in their framework is due to the existence of market distortions, mainly through their effects on αi,j, which are more relevant than βi,j when inputs are not weak substitutes in production. 

Market distortions play a role on the local stability properties of the steady state because they modify the elasticities of three crucial functions that characterize their two dimensional equilibrium dynamic system: the real interest rate, the real wage or equivalently effective consumption per unit of labor, and the generalized offer curve. 

In configurations (ii).1 and (iii).1 indeterminacy emerges for σ > σH1 = s−(1−s−ψ)(η−µ)−θ(1−s)(1+µ)ψ(η−µ) , provided εγis sufficiently small. 

By loglinearizing the system (3)-(4) around the normalized steady state,we obtain the local dynamics for K̂t = (Kt −K) /K and L̂t+1 = (Lt+1 − L) /L given by following equations:[ K̂t L̂t+1 ] = [ (1 + θε̺,K) θε̺,L ǫΓ,K−εΩ,K(1+θε̺,K)1+εΩ,LεΓ,L−θεΩ,Kε̺,L 1+εΩ,L ][ K̂t−1 L̂t ] ≡ [J ] [ Kt−1−K K Lt−L L ](6) Market distortions influence the local dynamics of the model, relatively to the perfectly competititive case, by modifying the elasticities εΩ,i, ε̺,i and εΓ,i. 

Although their methodology can be applied to any dynamic general equilibrium model, the dynamic framework considered in this paper is based on the perfectly competitive one sector model of a segmented asset economy of Woodford (1986) and Grandmont et al. (1998). 

Note also that bifurcations are quite relevant in explaining persistency of business fluctuations, since they appear when at least one eigenvalue crosses the unit circle. 

In the first example presented the authors consider a perfectly competitive economy where public expenditures, financed by variable taxation under a balanced budget rule, are introduced. 

In what follows, the authors denote by εX,y the elasticity, evaluated at the steady state, of the function X = {̺,Ω,Γ} with respect to the argument y = {K,L}, while εγ − 1 0 is the inverse of the elasticity of labor supply of the representative worker with respect to labor, s ∈ (0, 1) the elasticity of the production function with respect to capital, and σ > 0 is the elasticity of capital-labor substitution of the representative firm, all evaluated at the private level and at the steady state. 

As seen above, indeterminacy is possible in the presence of arbitrarily small distortions affecting either effective consumption or the offer curve. 

On the contrary, under labor market distortions (unions, efficiency wages, unemployment benefits, externalities in preferences), indeterminacy and bifurcations emerge for empirically plausible distortions. 

A perfect foresight intertemporal equilibrium of the economy with market distortions is a sequence (Kt−1, Lt) ∈ R 2 ++, t = 1, 2, ...,∞, that for a given K0 > 0 satisfies:Kt = β [1− δ + ̺t]Kt−1 (3)(1/B)Ωt+1Lt+1 = Γt (4)where ̺t ≡ A̺(Kt−1, Lt), Ωt ≡ AΩ(Kt−1, Lt) and Γt ≡ Γ(Kt−1, Lt). 

The first example is based on Dufourt et al. (2008), where the Woodford finance constrained framework is extended to take into account the existence of involuntary unemployment (see also Lloyd-Braga and Modesto (2007)). 

Trending Questions (1)
How to calculate labror market distortion?

The paper does not provide a specific method for calculating labor market distortions.