Indeterminacy with Externalities and Capital Utilization

Mohanad Ismael () and Francesco Magris

No 08-14, Documents de recherche from Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne

Abstract: In this paper, we present a dynamic general equilibrium model with two sectors: one aggregate firm produces consumption good and a second one investment good. We assume sector specific as well as aggregate ex- ternalities. Moreover, we account for variable capital utilization i.e. the depreciation rate is endogenously determined by the degree of capital ex- ploitation. We show that under mild conditions, multiple equilibria occur. Indeed, following Grandmont, Pintus and de Vilder (JET, 1998), we can identify the necessary conditions for which the economic dynamics does change stability. In our framework, the capital utilization improves the imperfection in production sectors, resulted from the specific and aggre- gate externalities. We show that endogenous fluctuations are more likely to appear as long as the sensitivity of the capital utilization is su¢ ciently high with respect to the capital. Further, this is true for low value of elasticity of factor substitution.

Keywords: Externalities; Variable capital utilization; Indeterminacy; Bifurcations (search for similar items in EconPapers)
JEL-codes: E22 E3 O40 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2008
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Working Paper: Indeterminacy with Externalities and Capital Utilization (2008)
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