EconPapers    
Economics at your fingertips  
 

Ruling out Indeterminacy: the Role of Heterogeneity

Berthold Herrendorf (), Akos Valentinyi () and Robert Waldmann ()

No 1858, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Models with externalities have become increasingly popular for studying both long-term growth and business-cycle fluctuations. Externalities can lead to indeterminacy, allowing self-fulfilling expectations to determine the equilibrium. This paper argues that the importance of indeterminacy might be overstated by the literature, as it does not recognize that heterogeneity across individuals can have a strong stabilizing effect. We illustrate this in a stylized two-sector economy with an externality by considering changes in the distribution of the individual entry costs into the two sectors. First, we find that the equilibrium is indeterminate (determinate) when the entry costs are relatively homogeneous (heterogeneous) across individuals. Our second result is that for any neighbourhood of any possible long-run outcome of the economy, there is a mean preserving spread of the entry cost distribution, such that the unique steady state lies in that neighbourhood and is saddle-path stable. This implies that the aggregate characteristics may not be informative even when there is determinacy. Thus indeterminacy is not necessary to explain the empirical fact that countries with very similar fundamentals can end up in rather different steady states.

Keywords: Aggregation; Heterogeneity; Indeterminacy; Multiple Equilibria (search for similar items in EconPapers)
JEL-codes: E1 O1 (search for similar items in EconPapers)
Date: 1998-04
References: Add references at CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=1858 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:1858

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=1858

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().

 
Page updated 2021-01-13
Handle: RePEc:cpr:ceprdp:1858