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Indeterminacy and Unemployment Fluctuations with Constant Returns to Scale in Production

Frédéric Dufourt (), Teresa Lloyd-Braga () and Leonor Modesto ()

No 4874, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We extend the finance-constrained economy proposed by Woodford (1986) to incorporate imperfectly insured unemployment, by introducing unions and unemployment benefits financed by labour taxation. We show that this simple extension of the Woodford model changes drastically its stability conditions and local dynamics around the steady state. In fact, in contrast to related models in the literature, we find that under constant returns to scale in production: (i) indeterminacy always prevails in the case of a unitary elasticity of substitution between capital and labour; (ii) flip and Hopf bifurcations occur for empirically credible elasticities of substitution between capital and labour, so that a rich set of dynamics may emerge at ‘realistic’ parameters’ values.

Keywords: bifurcations; endogenous fluctuations; imperfectly insured unemployment; indeterminacy (search for similar items in EconPapers)
JEL-codes: E24 E32 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2005-01
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