Mark Weder

Indeterminacy in a Small Open Economy Ramsey Growth Model

This paper presents a small open economy version of the Benhabib and Farmer [2] two sector optimal growth model with production externalities. It is shown that indeterminacy is considerably easier to obtain under a regime of perfect world capital markets than in the closed economy variant. Furthermore, the result is not dependent on high labour supply elasticity since that input is fixed. The paper also examines a variant that takes into account external borrowing constraints and it is shown that the qualitative results on indeterminacy remain basically unaffected by this extension.

Animal Spirits, Technology Shocks and the Business Cycle

In this paper a two-sector growth model allowing indeterminacy to occur at relatively mild degrees of increasing returns is developed. It is shown that these economies of scale need only be present in one sector of the economy (investment). This feature of the model, therefore, builds on evidence that was recently reported by Basu and Fernald (1996). The model is also able to solve some puzzles of business cycle research which standard Real Business Cycle models have not been able to. The introduction of animal spirits generates a low negative contemporaneous correlation of hours and productivity as well as a procyclical investment share. The model can account for the observed variability of hours worked.

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.

Complementarity of Labor Market Institutions, Equilibrium Unemployment and the Propagation of Business Cycles

Abstract This paper evaluates complementarities of labor market institutions and the business cycle in the context of a stochastic dynamic general equilibrium model economy. Matching between workers and vacancies with endogenous time spent in search, Nash-bargained wages, payroll taxation, and differential support for unemployed labor in search and leisure are central aspects of the model. For plausible regions of the policy and institutional parameter space, the model exhibits more persistence than standard real business cycle models and can exhibit indeterminacy of rational expectations paths without increasing returns in production. Furthermore, labor market institutions act in a complementary fashion in generating these effects.

Consumption Externalities, Production Externalities and Indeterminacy

In this paper we show that consumption externalities reduce the degree of increasing returns needed to generate indeterminacy in a two-sector optimal growth model. In equilibrium, consumption externalities operate as if the utility function is (close to) linear. If these externalities are strong, the minimum necessary increasing returns approach zero. Therefore, this paper-in a stylized fashion-provides an example of how microbehavior, i.e. interactions at the household level, can generate aggregate instability. Consumption externalities also help to eliminate the counterfactual cyclical behavior of consumption in the two-sector model.

The Role of Preference Shocks and Capital Utilization in the Great Depression

The paper investigates the notion that preference shocks play a central role in our understanding of the Great Depression. I identify a series of universally large negative shocks which destabilized the U.S. during the 1930s. When the artificial economy is paired with variable capital utilization and mildly increasing returns to scale in production, it is able to account for most of the decline in economic activity and it is able to predict realistic persistence.

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.

Taylor Rules and Macroeconomic Instability or How the Central Bank Can Preempt Sunspot Expectations

This paper derives new results on the effects of employing Taylor rules in economies that are subject to real market imperfections such as production externalities. Policies which respond to output movements can block sunspot equilibria that arise from the increasing returns. The paper also finds that rules which should be chosen (avoided) in perfect market environments often yield (ensure) multiple (unique) rational expectations solutions in alternative settings. Therefore, exact knowledge on the degree of market imperfection may be integral for robust policy advice.

SUNSPOTS AND CREDIT FRICTIONS

We examine a general equilibrium model with collateral constraints and increasing returns to scale in production. The utility function is nonseparable, with no income effect on the consumerÂi¯s choice of leisure. Unlike this model without a collateral constraint, we find that indeterminacy of equilibria is possible. Hence, business cycles can be driven by self-fulfilling expectations. This is the case for more realistic parametrizations than in previous, similar models without these features.

The Great Demand Depression

This paper entertains the notion that disturbances on the demand side play a central role in our understanding of the Great Depression. In fact, from Euler equation residuals we are able to identify a series of unusually large negative demand shocks that appeared to have hit the U. S. economy during the 1930s. This echoes the view originally promoted by Temin (1976). We apply these measured demand shocks to a dynamic general equilibrium model and find that size and sequence of shocks can generate a pattern of the model economy that is not unlike data. The model is able to account for the lions share of the decline in economic activity and is able to exaggerate realistic persistence.