progressive taxation and macroeconomic in stability with productive government spending abstract this paper systematically examines the interrelations between a progressive income tax schedule and macroeconomic in stability in an otherwise standard one sector real business model with productive government spending we analytically show that the economy exhibits indeterminacy and sunspots if and only if the equilibrium after tax wage hours locus is positively sloped and steeper than the household s labor supply curve unlike in the framework with useless public expenditures a less progressive tax policy may operate like an automatic stabilizer that mitigates belief driven cyclical fluctuations moreover our quantitative analysis shows that this result is able to provide a theoretically plausible explanation for the discernible reduction in us output volatility after the tax reform act of 1986 was implemented

new labour at work long term unemployment and the geography of opportunity new labour has placed great faith in active labour market policies to address problems of long term unemployment and poverty this paper considers the effectiveness of welfare to work programmes in light of persistent regional employment disparities within the uk it is argued that the government has proceeded from a flawed analysis of the causes and magnitude of long term unemployment framing the issue in terms of worklessness and neglecting demand side concerns of job availability and job quality

long term unemployment the invention of hysteresis and the misdiagnosis of structural unemployment in the uk this paper investigates the empirical basis for the belief that unemployment makes people less employable and that the existence of a pool of long term unemployed people is therefore in itself a barrier to full employment drawing on data for great britain from the 1940s to the present day it shows that this idea has arisen through misinterpretations of the statistical evidence the resulting policies besides diverting resources from the demand side pro grammes appropriate to the true situation of structural unemployment appear to have created a problem of the kind they were intended to address by encouraging unemployed people to move onto sickness benefits

new firm startups technology and macroeconomic fluctuations new firm startup activity is examined within a framework pooling a cross section of 117 industries over six time periods between 1976 and 1986 a model is introduced relating startup activity both to elements of the business cycle in particular the macroeconomic growth rate the cost of capital and the unemployment rate and to industry specific characteristics especially the technological conditions underlying the industry the pooled cross section regression results suggest that macroeconomic fluctuations as well as industry specific elements contribute to startup activity while new firm startups respond positively to macroeconomic growth they are promoted by a low cost of capital and high unemployment rate a somewhat surprising result is that new firm startups are not apparently deterred in capital intensive industries and where r d expenditures play an important role the empirical results suggest that new firms may be able to overcome their inherent size and experience disadvantages in such markets through exploiting university research and pursuing innovative activity

job seeker s allowance jsa benefit sanctions and labour market outcomes in britain 2001 2014 the dominant view among british policy makers is that benefit sanctions for the unemployed who are claiming the job seeker s allowance jsa are effective at increasing flows from unemployment into sustainable employment this paper tests this theory using aggregate cross sectional data for great britain for the period may 2001 to december 2014 descriptive analysis found the relationship between sanctions and labour market outcomes was ambiguous while trends in labour market outcomes were highly correlated with labour market demand multivariate svar time series analysis controlling for labour market demand found evidence that changes in the threat and use of sanctions had a positive impact on flows into work in the short run but not in the long term and had no definitive impact on ilo unemployment at all interrupted time series analyses suggest we cannot reject the null hypothesis that the impact of introduction of a new jsa sanctions regime in october 2012 with higher financial penalties associated with being sanctioned had no impact on flows into work from jsa in britain intensifying the use of sanctions and introducing harsher penalties associated with being sanctioned has been largely ineffective at increasing flows from jsa into sustainable employment given the negative financial and social impacts of sanctions on those affected and the lack of evidence of a sustained positive impact on employment the basis for the new sanctions policy is unclear

production function regressions returns to scale and externalities a number of recent papers have used simple linear regressions in an attempt to identify market structure the extent of returns to scale and possible external effects in u s manufacturing industries the results obtained from these regressions have important implications for several branches of modern macroeconomics as a result the macro literature frequently cites specific numerical evidence from caballero and lyons 1992 and hall 1990 which suggests that there are quantitatively significant increasing returns to scale or external effects in u s manufacturing in contrast it is the argument of this paper that this evidence is not convincing the most robust evidence suggests that the typical u s manufacturing industry displays constant returns with no external effects on the other hand there is significant heterogeneity across industries

increasing returns capital utilization and the effects of government spending abstract we show that a one sector real business cycle model with mild increasing returns to scale variable capital utilization and saddle path stability is able to produce qualitatively realistic business cycles driven solely by disturbances to government purchases due to an endogenous increase in labor productivity a positive spending shock can lead to simultaneous increases in output consumption investment employment and real wage our analysis illustrates a close relationship between this result and the recent literature that explores indeterminacy and sunspots in real business cycle models under laissez faire in particular the condition which governs the required magnitude of increasing returns for government spending shocks to generate procyclical macroeconomic effects is identical to that necessary for a laissez faire one sector real business cycle model to exhibit local indeterminacy

sectoral composition of government spending and macroeconomic in stability this article examines the quantitative interrelations between sectoral composition of public spending and equilibrium in determinacy in a two sector real business cycle model with positive productive externalities in investment when government purchases of consumption and investment goods are set as constant fractions of their respective sectoral output we show that the public consumption share plays no role in the model s local dynamics and that a sufficiently high public investment share can stabilize the economy against endogenous belief driven cyclical fluctuations when each type of government spending is postulated as a constant proportion of the economy s total output we find that there exists a trade off between public consumption versus investment expenditures to yield saddle path stability and equilibrium uniqueness 2014 western economic association international

portfolio rebalancing and the turn of the year effect this paper finds that for the 1935 1986 period the market s risk return relation does not have a january seasonal the findings differ from those of other studies due to the use of value weighted rather than equally weighted portfolios inferences are sensitive to the weighting procedure because of the small firm return patterns in january in particular even in those januaries for which the market return is negative small firm returns are positive and they are more positive the higher is beta this is consistent with the portfolio rebalancing explanation of the turn of the year effect since at least 1926 the average return on small firms in january has been unusually high a phenomenon known as the turn of the year effect in this paper we present new evidence regarding the risk return characteristics of small firms in january we find that for small firms there is a positively sloped riskreturn relation in both up and down markets this pattern is difficult to reconcile with the belief that the high return on small firms in january is equilibrium compensation for risk bearing we show how these patterns in small firms returns have led others to conclude that the market s risk return relation has a january seasonal in particular rozeff and kinney 21 and tinic and west 22 23 among others using equally weighted portfolios formed on the basis of historical betas have found a steeper slope for the capm s risk return relation in january than in other months we demonstrate that this pattern exists only for small firms consequently statistical inferences about the risk return relation are heavily dependent upon whether equally weighted or value weighted portfolio returns are used in the estimation we show that for 1935 86 when monthly cross sectional regressions are estimated using value weighted portfolio returns there is no more of a statistically significant difference in the estimated return to risk bearing in january than in the other eleven months of the year the notion that there is a january seasonal in the capm s risk return relation for the us has rapidly become accepted knowledge for example corhay hawawini and michel 6 accept this conclusion and investigate whether other

fickle consumers durable goods and business cycles abstract this paper develops a three sector dynamic general equilibrium model with the specific aim of evaluating the role of consumer durables in the generation and propagation of business cycles the model displays indeterminacy at commonly considered realistic parameter restrictions and basically constant returns to scale if calibrated at modest increasing returns to scale the sunspots driven model version produces a close match to moments of aggregate u s data journal of economic literatureclassification numbers e00 e32

indeterminacy and sunspots in a monetary economy with limited participation abstract this paper shows that in a monetary real business cycle model with limited participation the region of indeterminacy depends crucially on i the coefficient of relative risk aversion ii the labor supply elasticity and iii the degree of increasing return to scale however the quantitative impact of the money growth rate is very small

stationary sunspot equilibria in a finance constrained economy abstract stationary sunspot equilibria are shown to exist in a production economy with infinite lived agents when it is not possible to borrow against future wage income equilibrium fluctuations exhibit persistence over time scales of the same order of magnitude as observed business cycles an active fiscal policy that stabilizes aggregate money expenditures can prevent such fluctuations

comparing four models of aggregate fluctuations due to self fulfilling expectations abstract this paper compares four equilibrium business cycle models with increasing returns to scale production technologies that allow for aggregate fluctuations due to self fulfilling expectations necessary and sufficient conditions for the existence of stationary sunspot equilibria are derived numerical examples demonstrate that the degree of increasing returns necessary for the existence of stationary sunspot equilibria lies in the upper range of available empirical estimates the paper also shows that persistent fluctuations are not a necessary property of these four models when the only source of fluctuations is changes in people s expectations about the future path of the economy journal of economic literature classification numbers e32 d43

uniqueness and indeterminacy on the dynamics of endogenous growth abstract in this paper we study the dynamics of endogenous growth both in the model of lucas and in a generalization that incorporates a labor leisure choice we characterize the regions of the parameter space that give rise to unique equilibria as well as the regions that yield a continuum of equilibria with positive growth rates we find that such multiple equilibria exist for empirically very plausible parameters in particular when the lucas model is modified to incorporate endogenous labor journal of economic literature numbers e00 e3 o40

risk return and equilibrium a revisit this paper reports the results of tests of the major implications of the two parameter capital asset pricing model the findings indicate that the relationship between stock returns and systematic risk contains important nonlinearities during 1935 82 these nonlinearities cannot be ascribed to previously documented anomalies related to firm size or january seasonality moreover the test results appear to be sensitive to the choice of the proxy for the market portfolio

the economics of new labour policy and performance this paper reviews the foundations of new labour s economic policies and the performance of the economy since 1997 it argues that new labour s policies have evolved from thatcherism and that it has largely embraced the tenets of neo liberalism new labour has rejected most aspects of keynesianism and its policies have eschewed the use of active demand management policies but it has been the high levels of demand in particular consumption expenditure that have driven economic growth in the uk and which have ensured that as yet new labour has not faced the problems of dealing with a major economic downturn

indeterminacy and sunspots with constant returns recently there has been a renewed interest in the possibility of indeterminacy and sunspots or alternatively put in the existence of a continuum of equilibria that arises in dynamic economies with some market imperfections much of the research in this area has been concerned with the empirical plausibility of indeterminacy in markets with external effects or with monopolistic competition and which exhibit some degree of increasing returns while the early results on indeterminacy relied on relatively large increasing returns and high markups more recently benhabib and farmer 1996a showed that indeterminacy can also occur in two sector models with small sector specific external effects and very mild increasing returns

sensitivity of the bank stock returns distribution to changes in the level and volatility of interest rate a garch m model abstract the objective of this paper is to employ the generalized autoregressive conditionally heteroskedastic in the mean garch m methodology to investigate the effect of interest rate and its volatility on the bank stock return generation process this framework discards the restrictive assumptions of linearity independence and constant conditional variance in modeling bank stock returns the model presented here allows for shifts in the volatility equation in response to the changes in monetary policy regime in 1979 and 1982 to be estimated arch garch and volatility feed back effects are found to be significant interest rate and interest rate volatility are found to directly impact the first and the second moments of the bank stock returns distribution respectively the latter also affects the risk premia indirectly the degree of persistence in shocks is substantial for all the three bank portfolios and sensitive to the nature of the bank portfolio and the prevailing monetary policy regime

coexistence of money and interest bearing securities abstract a random matching model with money is used to study the nominal yield on small denomination bearer safe discount securities issued by the government there is always one steady state with matured securities circulating at par and for some parameters another with them circulating at a discount in the former a necessary and sufficient condition for a positive nominal yield on not yet matured securities is exogenous discriminatory treatment of them by the government in the latter the post maturity discount on securities induces a deeper pre maturity discount even without such discriminatory treatment

endogenous business cycles and the dynamics of output hours and consumption abstract this paper studies the business cycle fluctuations predicted by a two sector endogenous business cycle model with sector specific external increasing returns to scale it focuses on aspects of actual fluctuations that have been identified both as defining features of business cycles and as ones standard real business cycle models cannot explain for empirically realistic calibrations of the degree of returns to scale the results suggest that endogenous fluctuations do not provide the dynamic element that is missing in existing real business cycle models jel e32

the role of intratemporal adjustment costs in a multisector economy abstract in this paper we construct a multisector business cycle model which is capable of reproducing the procyclical behavior of cross sector measures of capital employment and output we start by documenting the difficulty that a standard variant of a conventional real business cycle model has in accounting for these facts we then show how the introduction of intratemporal adjustment costs for investment can significantly enhance the performance of such a model these costs make it difficult to alter the composition of production of new capital goods the presence of these costs eliminates many counterfactual observations of the model that would otherwise be present the dynamic response of variables in the model is different from what one would observe in the standard one sector model we also examine the implications of imposing intratemporal adjustment costs for labor the model can also account for the cross sector behavior of employment observed in the data

the robustness of risk return nonlinearities to the normality assumption in a recent study tinic and west 1986 empirically reexamine the risk return relationship posited by the traditional mean variance capm they find a positive nonlinear relationship between risk and return except during january when the market rewards bearing nonsystematic risk this study examines the hypothesis that nonnormality of re turn distributions may account for some of these anomalous results we compare shalit and yitzhaki s 1984 mean extended gini capm an equilibrium asset pricing relation that is independent of the form of the underlying asset distribution with the traditional capm our results indicate that the nonlinear risk return relationship and the size and january effects are robust to nonnormality of return distributions

asset pricing in a generalized mean lower partial moment framework theory and evidence a new asset pricing model that generalizes earlier results in the downside risk literature is developed and empirically tested using a multivariate approach by specifying risk as deviations below any arbitrary target rate of return the generalized mean lower partial moment mlpm model overcomes the limited appeal of earlier formulations and moreover a large class of extant pricing models using alternative risk measures variance semivariance semideviation probability of loss etc becomes special cases of the new framework empirical tests indicate that the new model cannot be rejected against an unspecified alternative for a large set of target rates of return the traditional capm on the other hand is rejected as a well specified alternative the mlpm target rates inferred from market data appear to be related to equity market mean returns rather than to the riskfree rate the target rate that is implicit in the capm and explicit in earlier downside risk formulations the attractiveness of downside risk measures for decision making purposes has been noted in the financial economic literature for over a quarter of a century 1 risk from this perspective is measured in terms of deviations below some exogenously prespecified target rate of return and a formal analysis of these risk measures for various utility functions has been presented by bawa 1975 in terms of the lower partial moment lpm of the asset distributions the appeal of these risk measures has been based in part on their consistency with the way individuals actually perceive risk notwithstanding its intuitive appeal this area of research has been virtually neglected in recent years we believe that this disaffection with downside risk models tends from two sources first earlier models of this genre exogenously specify the target rate to equal the risk free interest rate in the absence of a satisfactory theory for explaining how investors establish their target rates this assumption as argued herein has been motivated more by technical reasons than economic considerations second empirical tests

the siable law model of stock returns this study investigates the tail shapes of empirical distributions of returns on an extensive group of common stocks the tails of the return distributions are found to be thinner than those of infinite variance stable distributions therefore although homogeneity is evident in general economic and statistical inferences drawn from stable law parameters estimated from samples of stock returns may be misleading this is in spite of the apparent overall similarity in shape between empirical and stable distributions

two moment decision models and expected utility maximization two moment decision models are consistent with expected utility maximization only if the choice set or the agent s preferences are restricted this paper identifies a restriction which is sufficient to ensure this consistency and confirms that it holds in many economic models the implications for economic analysis are then derived two different approaches to representing an agent s preferences over strategies yielding random payoffs are in wide use under the mean standard deviation ms approach the agent is assumed to rank the alternatives according to the value of some function defined over the first two moments of the random payoff while the expected utility eu criterion assumes that the expected value of some utility function defined over payoffs is used instead the fact that there are these two competing approaches has generated a considerable literature some authors are concerned with the advantages and disadvantages of each while others deal with conditions under which the potentially different approaches would yield the same results or at least approximately so space does not

indeterminacy and increasing returns abstract we 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 the first involves input externalities the second involves monopolistic competition we show for parameters in close accord with recent literature on real business cycles that the model displays an indeterminate steady state that can be exploited to generate a model of business fluctuations driven by self fulfilling beliefs in our first class of models growth is generated by exogenous increases in factor productivity in the second class the marginal product of capital is large enough for endogenous growth journal of economic literature classification numbers e00 e3 o40

the geographical concentration of labour market disadvantage this paper argues that british welfare to work policies are inadequate given the geographical concentration of worklessness in northern regions and in cities and former coalfields while unemployment has been converging geographically inactivity has not all the welfare to work target groups youth unemployed long term unemployed lone parents the long term sick and partners of the unemployed have closely similar geographical distributions official arguments that there are adequate job vacancies everywhere are shown to be flawed the geography of worklessness is largely explained by the weakness of adjustment through migration and commuting to the loss of jobs in manufacturing and mining the cities being particularly affected by urban rural manufacturing shift policy needs to promote more relevant employment in high unemployment areas through increased spending on derelict land reclamation transport and other infrastructure the case for more supportive policies towards manufacturing should also be considered

indeterminacy with capital utilization and sector specific externalities abstract we show that the minimum level of increasing returns to scale needed for indeterminacy in a two sector real business cycle model with variable capital utilization and sector specific externalities is extremely small moreover this value is lower than that required in several of our model s predecessors and is quite easily within the range of empirical plausibility

chaos and sector specific externalities abstract benhabib and farmer 1996 indeterminacy and sector specific externalities journal of monetary economics 37 397 419 explore the possibility of local indeterminacy in a two sector model with sector specific externalities they find that very small sector specific externalities are sufficient for local indeterminacy in this case it is possible to construct sunspot equilibria where extrinsic uncertainty matters in this paper i provide a global analysis of their model revealing the existence of euler equation branching this branching allows for regime switching equilibria with cycles and chaotic behavior these equilibria occur whether the local dynamics are determinate or indeterminate

chaos sunspots and automatic stabilizers abstract we consider a real business cycle model with an externality in production depending on parameter values the model has sunspot equilibria cyclical and chaotic equilibria and equilibria with deterministic or stochastic regime switching we study the implications of this model environment for automatic stabilizer tax systems stabilization is desirable because the efficient allocations are characterized by constant employment and output growth we identify an automatic stabilizer income tax subsidy schedule with two properties i it specifies the tax rate to be an increasing function of aggregate employment and ii earnings are subsidized when aggregate employment is at its efficient level the first feature eliminates inefficient fluctuating equilibria while the second induces agents to internalize the externality

mean gini portfolio theory and the pricing of risky assets this paper presents the mean gini mg approach to analyze risky prospects and construct optimum portfolios the proposed method has the simplicity of a mean variance model and the main features of stochastic dominance efficiency since mean gini is consistent with investor behavior under uncertainty for a wide class of probability distributions gini s mean difference is shown to be more adequate than the variance for evaluating the variability of a prospect the mg approach is then applied to capital markets and the security valuation theorem is derived as a general relationship between average return and risk this is further extended to include a degree of risk aversion that can be estimated from capital market data the analysis is concluded with the concentration ratio to allow for the classification of different securities with respect to their relative riskiness

seasonality in canadian stock prices a test of the tax loss selling hypothesis a popular hypothesis to explain the anomalous january returns of common stocks is based on the argument that there is considerable tax loss selling by investors toward the end of the year the purpose of this study is to test the tax loss selling hypothesis with data on canadian stocks although the introduction of capital gains tax in canada seems to have affected the behavior of stock returns the findings do not support the proposition that taxinduced trading is the sole cause ofthe seasonality in stock returns in canada i introduction over the past several years a number of studies have shown that the returns on common stocks in general and the stocks of small companies in particular tend to be abnormally high during the month of january keim 10 demonstrated quite clearly that a very high percentage of the abnormal positive returns gener ated on stocks with low market capitalizations occurs during january with the returns during the first five trading days of the year accounting for most of the anomalous behavior his results were recently confirmed by roll 14 who re ported that around 37 percent of the annual differences in the returns on the equally weighted and value weighted indices of nyse and amex stocks is ac counted for by what happens in the five trading days from the last trading day in december through the fourth trading day in january a popular hypothesis to explain the so called january effect in stock re turns is based on the argument that there is considerable end of the year tax lossselling by investors originally proposed by wachtel 19 it asserts that inves tors try to realize losses towards the end of the year to reduce their taxes thereby putting downward pressure on stock prices according to the hypothesis once

risk return and equilibrium an extension this study extends a recent empirical reexamination of the risk ret urn relationship by examining the possibility that an omitted size re lationship may account for the anomalous results h levy s generaliz ed capital asset pricing model provides the theoretical basis for incorporating the impact of firm size on expected return by examining the relative importance of unsystematic risk in pricing closely held securities compared to pricing widely held securities in so doing the empirical analysis also provides a test of an implication of the generalized capital asset pricing model two methodologies are used t o test the hypotheses empirically the results indicate that even thou gh size has a significant impact on the risk return relationship it apparently does not account for the anomalous results this implicati on is consistent under both methodologies copyright 1988 by the university of chicago

new evidence on real wage employment correlations from u s manufacturing data abstract the stylized fact of positive real wage employment correlation first noted by dunlop 1938 tarshis 1939 and keynes 1939 is re examined using alternative price deflators and detrending procedures we find little evidence that real wages are uniformly procyclical in either aggregate or disaggregated u s manufacturing

indeterminacy home production and the business cycle a calibrated analysis abstract in this paper i present a business cycle model with one market sector that produces a standard good and another that produces a non market or home good the model can have multiple equilibria and therefore cycles driven only by self fulfilling expectations with low externalities to market production in particular an upward sloping aggregate labor demand as e g in farmer and guo j economic theory 63 1994 42 72 is not required for indeterminacy the effect of technology shocks is also studied in all cases the time series that are generated have properties that are comparable to the real us postwar series

risk and return abstract this paper examines the seasonality in the basic relationship between expected return and risk during 1935 82 the results reveal that the positive relationship between return and risk is unique to january the risk premiums during the remaining eleven months are not significantly different from zero

tracing externalities as sources of indeterminacy abstract this paper offers further inquiry into sources of indeterminacy in general equilibrium we take a more agnostic approach than previous work as we allow for a more general interpretation of externalities in particular we identify the origin of scale economies as being from either labor or capital we find that in the one sector model it is primarily the externalities associated with labor that generate the result however in the two sector model indeterminacy can be ultimately traced back to the externalities from capital in the investment sector

animal spirits technology shocks and the business cycle the last few years have witnessed a revival of business cycle models in which beliefs of agents have played a leading role in explaining economic fluctuations 1 most of these models involve strong economy wide increasing returns to scale in order for sunspot equilibria to exist in a recent paper however basu and fernald 1996 present evidence that returns to scale are far from evenly distributed across the u s economy in particular they report that scale economies are present mainly in the domain of durable goods production in the nondurable goods sector of the u s economy evidence of increasing returns to scale cannot be found

indeterminacy in a model with aggregate and sector specific externalities abstract we present a two sector dynamic general equilibrium model with both sector specific and aggregate externalities we find that including the aggregate effects allows for a trade off between the sizes of the two types of externalities needed for indeterminacy

firm dynamics and markup variations implications for sunspot equilibria and endogenous economic fluctuations this paper analyzes how the interaction between firms entry and exit decisions and variations in competition gives rise to self fulfilling expectation driven fluctuations in aggregate economic activity and in measured total factor productivity tfp the analysis is based on a dynamic general equilibrium model in which net business formation is endogenously procyclical and leads to endogenous countercyclical variations in markups this interaction leads to indeterminacy in which economic fluctuations occur as a result of self fulfilling shifts in the beliefs of rational forward looking agents when calibrated with empirically plausible parameter values and driven solely by self fulfilling shocks to expectations the model can quantitatively account for the main empirical regularities characterizing postwar u s business cycles and for 65 of the fluctuations in measured tfp

macroeconomic in stability under real interest rate targeting we show that in a one sector monetary endogenous growth model under real interest rate targeting the local stability properties of the economy s balanced growth path depend crucially on the exact formulation of the cash in advance constraint and the degree of productive externalities in particular when a positive fraction including 100 of gross investment is subject to the liquidity constraint the model exhibits indeterminacy and sunspots if and only if the equilibrium wage hours locus is positively sloped and steeper than the labor supply curve on the other hand when real money balances are required only for the household s consumption purchases the economy always displays saddle path stability and equilibrium uniqueness regardless of the strength of productive externalities

real business cycles and the animal spirits hypothesis abstract we calibrate a quantitative equilibrium macroeconomic model with an aggregate technology that is subject to increasing returns and show that this model may display fluctuations at business cycle frequencies even when there are no shocks to the fundamentals of the economy these fluctuations are due to the self fulfilling beliefs of investors which we call animal spirits we compare the impulse response functions predicted by our model and by two other more standard models with a four variable vector autoregression on u s data our animal spirits economy is the most successful of the three at matching broad features of the dynamic responses in the data journal of economic literature classification numbers e00 e3 e32

indeterminacy in a model with sector specific externalities abstract i examine a model with two sectors of production consumption and investment in the model indeterminacy of equilibria results due to the presence of small sector specific externalities in production in fact i find that indeterminacy results with a certain minimum value of the externality in the investment sector even with no externality in the consumption sector i find that the indeterminacy properties of the model vary depending on the form of the utility function for example with utility that is logarithmic in consumption these properties are completely independent of the value of the externality in the consumption sector

indeterminacy with no income effect preferences and sector specific externalities abstract we examine a two sector real business cycle rbc model with sector specific externalities in which household utility exhibits no income effect on the demand for leisure unlike in the one sector counterpart indeterminacy can result with sufficiently high returns to scale in the investment sector moreover the smaller the labor supply elasticity the lower the level of externalities needed for indeterminacy this finding is the opposite of that in all existing rbc based indeterminacy studies finally in contrast to previous sunspot driven two sector rbc models our economy is able to match the stylized facts that sectoral labor inputs are positively correlated and consumption is procyclical

on the stability of the two sector neoclassical growth model with externalities we study a class of two sector growth models with sector specific externalities in which one sector produces consumption and the other sector produces investment the novelty is that investment allocated to the consumption sector is an imperfect substitute for investment allocated to the investment sector we show analytically that in this case local indeterminacy near the steady state is impossible for every empirically plausible specification of the model parameters more specifically we show that a necessary condition for local indeterminacy is an upward sloping aggregate labor demand curve in the investment sector which requires a counterfactual strength of the externality we show numerically that an elasticity of substitution of plausible size implies determinacy near the steady state these findings differ sharply from the standard result for two sector models that if the investments allocated to the two sectors are perfect substitutes then local indeterminacy occurs for a wide range of plausible parameter values

persistence and volatility of beveridge cycles this paper aims to explain the magnitude and cyclical behavior of the fluctuations in unemployment and vacancies adding demand externalities to an otherwise standard search and matching model reduces the need for exogenous shocks in explaining these fluctuations under plausible parameter values the equilibrium dynamics include a stable limit cycle that resembles the empirically observed counterclockwise cycles around the beveridge curve quantitatively these endogenous beveridge cycles can explain half of the volatility and almost all persistence of unemployment without any exogenous forces avoiding the amplification and propagation problems of the standard model