Capital-labor substitution and equilibrium indeterminacy

Jang-Ting Guo and Kevin Lansing

Journal of Economic Dynamics and Control, 2009, vol. 33, issue 12, 1991-2000

Abstract: This paper examines the quantitative relationship between the elasticity of capital-labor substitution in production and the conditions needed for equilibrium indeterminacy (and belief-driven fluctuations) in a one-sector growth model. With variable capital utilization, the substitution elasticity has little quantitative impact on the minimum degree of increasing returns needed for indeterminacy. However, when capital utilization is constant, a below-unity substitution elasticity sharply raises the minimum degree of increasing returns because it imposes a higher effective adjustment cost on labor hours. Overall, our results show that empirically-plausible departures from the Cobb-Douglas production specification can make indeterminacy more difficult to achieve.

Keywords: Capital-labor; substitution; Equilibrium; indeterminacy; Capital; utilization; Real; business; cycles; Sunspots (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (32)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:33:y:2009:i:12:p:1991-2000

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