Credit Market Imperfection, Labor Supply Complementarity, and Global Indeterminacy
نویسندگان
چکیده
The possibility of sunspot equilibria and endogenous cycles due to self-fulfilling expectations are explored in a one-sector overlapping-generations model with credit market imperfection. It is shown that a strategic complementarity between agent’s optimal labor supply decisions may arise when the credit market is imperfect. Multiplicity of steady states and local indeterminacy of equilibrium can arise if the complementarity between agents’ labor supply decisions is sufficiently strong. In some cases, local determinacy can also lead to global indeterminacy in which case stationary sunspot equilibria can be constructed as a randomization between different locally unique equilibrium paths. As a result, the aggregate fluctuations due to self-fulfilling expectations can take place and history-versus-expectations considerations can arise. Escape from underdevelopment trap as well as fall into poverty can become a self-fulfilling prophecy.
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