Discussion Paper Details

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Title: Indeterminacy and Unemployment Fluctuations with Constant Returns to Scale in Production

Author(s): Frédéric Dufourt, Teresa Lloyd-Braga and Leonor Modesto

Publication Date: January 2005

Keyword(s): bifurcations, endogenous fluctuations, imperfectly insured unemployment and indeterminacy

Programme Area(s): International Macroeconomics

Abstract: We extend the finance-constrained economy proposed by Woodford (1986) to incorporate imperfectly insured unemployment, by introducing unions and unemployment benefits financed by labour taxation. We show that this simple extension of the Woodford model changes drastically its stability conditions and local dynamics around the steady state. In fact, in contrast to related models in the literature, we find that under constant returns to scale in production: (i) indeterminacy always prevails in the case of a unitary elasticity of substitution between capital and labour; (ii) flip and Hopf bifurcations occur for empirically credible elasticities of substitution between capital and labour, so that a rich set of dynamics may emerge at ?realistic? parameters? values.

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Bibliographic Reference

Dufourt, F, Lloyd-Braga, T and Modesto, L. 2005. 'Indeterminacy and Unemployment Fluctuations with Constant Returns to Scale in Production'. London, Centre for Economic Policy Research.