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Animal spirits in cash-in-advance economies

Stefano Bosi, Frédéric Dufourt () and Francesco Magris

Recherches économiques de Louvain, 2007, vol. 73, issue 2, 131-151

Abstract: The possibility of indeterminacy and sunspot fluctuations in dynamic rational expectations models has been often questioned on empirical grounds, for such models are widely believed to rely on implausibly high degrees of increasing returns to scale and/or other controversial calibrations of economic fundamentals. In this paper, we study the occurrence of such phenomena in a standard (one-sector) optimal growth model with endogenous labor supply and a partial cash-in-advance constraint on consumption purchases. We show that, under standard preferences and constant returns to scale in production, indeterminacy typically prevails for an arbitrarily small amplitude of the liquidity constraint. We also analyze the cyclical properties of the model submitted to technological and beliefs disturbances and observe that it performs as well as comparable indeterminate models in the literature. JEL Classification: D90, E32, E41.

Keywords: cash-in-advance; indeterminacy; business cycles (search for similar items in EconPapers)
JEL-codes: D90 E32 E41 (search for similar items in EconPapers)
Date: 2007
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