DP1403 Indeterminacy and Sector-specific Externalities

Author(s):	Jess Benhabib, Roger E A Farmer
Publication Date:	May 1996
Keyword(s):	Business Fluctuations, Indeterminacy, Sunspots
JEL(s):	E00, E4
Programme Areas:	International Macroeconomics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=1403

We introduce mild increasing returns to scale into a version of the Real Business Cycle model. These increasing returns to scale occur as a consequence of sector-specific externalities, that is, externalities where the output of the consumption and investment sectors have external effects on the output of firms within their own sector. Keeping the production technologies for both sectors identical, for expositional simplicity, we show that indeterminacy can easily occur for parameter values typically used in the real business cycle literature, and in contrast to some earlier literature on indeterminacies, for externalities mild enough so that labour demand curves are downward sloping.