scholarly journals LOCAL INDETERMINACY IN CONTINUOUS-TIME MODELS: THE ROLE OF RETURNS TO SCALE

2012 ◽  
Vol 17 (2) ◽  
pp. 326-355 ◽  
Author(s):  
Jean-Philippe Garnier ◽  
Kazuo Nishimura ◽  
Alain Venditti
Keyword(s):  
Continuous Time ◽  
Returns To Scale ◽  
Capital Intensity ◽  
Investment Good ◽  
Intertemporal Substitution ◽  
Elasticity Of Intertemporal Substitution ◽  
Good Sector ◽  
Social Returns ◽  
Local Determinacy ◽  
Local Indeterminacy

The aim of this paper is to discuss the effect on returns to scale on the local determinacy properties of the steady state in a continuous-time two-sector economy with endogenous labor supply and sector-specific externalities. First we show that when labor is inelastic and the elasticity of intertemporal substitution in consumption is large enough, for any configuration of the returns to scale, local indeterminacy is obtained if there is a capital intensity reversal between the private and the social levels. Second, we prove that when labor is infinitely elastic, saddlepoint stability is obtained if the investment good sector has constant social returns, whereas local indeterminacy arises if the investment good sector has increasing social returns and the elasticity of intertemporal substitution in consumption admits intermediate values. Finally, our main conclusion shows that local indeterminacy requires a low elasticity of labor when the investment good has constant social returns, but requires either a low enough or a large enough elasticity of labor when the investment good has increasing social returns.

scholarly journals A NOTE ON BALANCED-BUDGET INCOME TAXES AND AGGREGATE (IN)STABILITY IN MULTI-SECTOR ECONOMIES

2019 ◽  
pp. 1-20
Author(s):  
Nicolas Abad ◽  
Alain Venditti
Keyword(s):  
Oecd Countries ◽  
Income Taxes ◽  
Labor Income ◽  
Investment Good ◽  
Tax Rate ◽  
Consumption Good ◽  
Good Sector ◽  
Local Indeterminacy ◽  
Balanced Budget ◽  
Capital Intensive

We examine the impact of balanced-budget labor income taxes on the existence of expectation-driven business cycles in a two-sector version of the Schmitt-Grohé and Uribe (SGU) [(1997) Journal of Political Economy 105, 976–1000] model with constant government expenditures and counter-cyclical taxes. Our results show that the destabilizing impact of labor income taxes strongly depends on the capital intensity difference across sectors. Local indeterminacy is indeed more likely when the consumption good sector is capital intensive, as the minimal tax rate decreases, and less likely when the investment good sector is capital intensive, as the minimal tax rate increases. The implication of this result can be quantitatively significant. Indeed, when compared to SGU, local indeterminacy can be either completely ruled out for all OECD countries when the investment good is sufficiently capital intensive or drastically improved, delivering indeterminacy for a larger set of OECD countries, if the consumption good is sufficiently capital intensive. Focusing however on recent estimates of the sectoral capital shares corresponding to the empirically plausible case of a capital intensive consumption good, we find that there is a significant increase of the range of economically relevant labor tax rates (from a minimum tax rate of 30% to 24.7% for which local indeterminacy arises with respect to the aggregate formulation of SGU.

EXPECTATIONS-DRIVEN FLUCTUATIONS WHEN FACTOR UTILIZATION IS VARIABLE

2004 ◽  
Vol 8 (1) ◽  
pp. 3-26 ◽  
Author(s):  
PATRICK A. PINTUS
Keyword(s):  
Empirical Studies ◽  
Returns To Scale ◽  
Increasing Returns ◽  
Constant Input ◽  
Input Substitution ◽  
Factor Substitution ◽  
Local Determinacy ◽  
Local Indeterminacy ◽  
Labor Utilization ◽  
Constant Returns To Scale

The present paper studies the influence of variable labor utilization on local indeterminacy and expectations-driven fluctuations, in one-sector models with (nearly) constant returns to scale. It is shown that, in comparison to the configuration of constant input utilization, considering variable utilization reduces the actual possibilities of factor substitution and, consequently, the range of input substitution elasticities that are compatible with endogenous fluctuations. In particular, local indeterminacy and expectations-driven fluctuations occur only if utilization rates are sufficiently inelastic, whereas local determinacy prevails when utilization is highly elastic. However, accounting for the fact that variable utilization reduces theeffectiveelasticity of capital/labor substitution leads us to argue that expectations-driven fluctuations are more plausible because they require larger elasticities ofapparentinput substitution. In contrast with the recent literature, the analysis does not rely on significantly increasing returns to scale in production. Accordingly, the results are not at variance with recent empirical studies emphasizing the importance of variable utilization and denying the evidence of large increasing returns.

Macroeconomic (in)stability and endogenous market structure with productive government expenditure

2017 ◽  
Vol 21 (2) ◽  
Author(s):  
Cheng-Wei Chang ◽  
Ching-Chong Lai
Keyword(s):  
Government Spending ◽  
Monopolistic Competition ◽  
Government Expenditure ◽  
Returns To Scale ◽  
Production Externalities ◽  
Congestion Effect ◽  
Local Indeterminacy ◽  
Endogenous Market Structure ◽  
Productive Government Spending ◽  
Productive Government Expenditure

AbstractWe consider the congestion effect of productive government spending in a monopolistic competition model with endogenous entry, and analyze the possibility of local indeterminacy. Some main findings emerge from the analysis. First, the indeterminacy condition is independent of the monopoly power. Second, productive government expenditure can be a source of local indeterminacy, while a higher degree of public goods congestion lessens the beneficial effect of productive government expenditure, and therefore reduces the possibility of indeterminacy. Third, a higher degree of internal returns to scale is associated with a lower possibility for the emergence of indeterminacy when production externalities are present.

ASSET PRICING IN DYNAMIC STOCHASTIC GENERAL EQUILIBRIUM MODELS WITH INDETERMINACY

2007 ◽  
Vol 12 (1) ◽  
pp. 50-71 ◽  
Author(s):  
NATALIA GERSHUN ◽  
SHARON G. HARRISON
Keyword(s):  
Asset Pricing ◽  
General Equilibrium ◽  
Returns To Scale ◽  
Dynamic Stochastic General Equilibrium ◽  
Increasing Returns ◽  
Dsge Model ◽  
Increasing Returns To Scale ◽  
Local Indeterminacy ◽  
Dynamic Stochastic ◽  
The One

We explore asset pricing in the context of the one-sector Benhabib-Farmer-Guo (BFG) model with increasing returns to scale in production and compare our results with financial implications of the standard dynamic stochastic general equilibrium (DSGE) model. Our main goal is to determine the effects of local indeterminacy and the presence of sunspot shocks on asset pricing. We find that the BFG model does not adequately represent key stylized facts of U.S. capital markets and does not improve on the asset-pricing results obtained in the standard DSGE model.

scholarly journals A Tax-Based Estimate of the Elasticity of Intertemporal Substitution

2013 ◽  
Vol 03 (01) ◽  
pp. 1350001 ◽  
Author(s):  
Jonathan Gruber
Keyword(s):  
Time Series ◽  
Interest Rate ◽  
Interest Rates ◽  
Consumer Expenditure ◽  
Intertemporal Substitution ◽  
Tax Rate ◽  
Elasticity Of Intertemporal Substitution ◽  
Using Data ◽  
The Interest Rate ◽  
The Impact

One of the most important behavioral parameters in macroeconomics is the elasticity of intertemporal substitution (EIS). Starting with the seminal work of Hall (Hall, R., 1978, Stochastic Implications of the Life Cycle — Permanent Income Hypothesis: Theory and Evidence, Journal of Political Economy 86, 971–987), researchers have used an Euler equation framework to estimate the EIS, relating the growth rate of consumption to the after-tax interest rate facing consumers. This large literature has, however, produced very mixed results, perhaps due to an important limitation: The impact of the interest rate on consumption or savings is identified by time-series movements in interest rates. Yet the factors that cause time-series movements in interest rates may themselves be correlated with consumption or savings decisions. I address this problem by using variation across individuals in the capital income tax rate. Conditional on observable characteristics of individuals, tax rate movements cause exogenous shifts in the after-tax interest rate. Using data on total non-durable consumption from the Consumer Expenditure Survey over two decades, I estimate a surprisingly high EIS of two. This finding is robust to a variety of specification checks.

Sign in / Sign up

Export Citation Format

Share Document