Indeterminacy and E-stability in Real Business Cycle Models with Factor-Generated Externalities
نویسندگان
چکیده
This paper provides a solution to the stability puzzle (Evans and McGough [11]): indeterminacy almost always implies expectational unstability in reduced-form real business cycle (RBC) models. After relaxing the restrictions on the magnitude of capital externalities with CobbDouglas technology, we nd regions for joint indeterminacy and E-stability in the following cases that i) the felicity function is separable in consumption and leisure and there are negative capital externalities; and ii) the felicity function is non-separable and the social elasticity of production with respect to capital exceeds one. We further show that with the general utility function, a necessary condition for joint indeterminacy and E-stability is that the labor-demand curve is upward-sloping and steeper than the Frisch labor-supply curve. JEL classi cation: C62, D11, D83, E32.
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