Indeterminacy and Sector-specific Externalities

Jess Benhabib and Roger Farmer

No 1403, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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.

Keywords: Business Fluctuations; Indeterminacy; Sunspots (search for similar items in EconPapers)
JEL-codes: E00 E4 (search for similar items in EconPapers)
Date: 1996-05
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Citations: View citations in EconPapers (228)

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Related works:
Journal Article: Indeterminacy and sector-specific externalities (1996)
Working Paper: Indeterminacy and Sector-Specific Externalities (1996)
Working Paper: Indeterminacy and Sector-Specific Externalities (1995)
Working Paper: Indeterminacy and Sector-Specific Externalities (1994)
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