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Global indeterminacy in locally determinate real business cycle models

Tarek Coury (tarekcoury@gmail.com) and Yi Wen

International Journal of Economic Theory, 2009, vol. 5, issue 1, 49-60

Abstract: We investigate the global dynamics of real business cycle models with production externalities. We confirm that purely local analysis does not tell the full story. With externalities smaller than required for local indeterminacy, local analysis shows the steady state to be a saddle, implying a unique equilibrium. However, global analysis reveals that the steady state is surrounded by stable deterministic cycles. Our analysis suggests that indeterminacy is more pervasive than previously believed, and the results strengthen the view that caution should be exercised when linearized versions of this class of real business cycle models are used in applied work.

Date: 2009
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Citations: View citations in EconPapers (14)

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https://doi.org/10.1111/j.1742-7363.2008.00102.x

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