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Endogenous business cycles: Capital-labor substitution and liquidity constraint

Stefano Bosi () and Francesco Magris
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Stefano Bosi: EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne

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Abstract: It is well known from the literature that the introduction of liquidity constraints in infinite-horizon economies may be responsible for the occurrence of local indeterminacy and sunspot fluctuations. Yet, the question of the robustness of such phenomena when the constraints are progressively relaxed, and the possibility of intertemporal arbitrage on the part of the agents increases, remains open. In this paper we study such an issue by departing from the Cazzavillan et al. (J. Economic Theory 80 (1998) 60-107) framework with heterogeneous agents, financial constraint on wage income, and positive externalities in aggregate capital and labor. We observe that local indeterminacy and sunspot fluctuations persist for a wide range of amplitudes of the liquidity constraint, although they finally disappear when the 'degree' of liquidity of the economy is made arbitrarily large. © 2002 Elsevier Science B.V. All rights reserved.

Keywords: Sunspot equilibria; Liquidity constraint; Indeterminacy (search for similar items in EconPapers)
Date: 2002-09
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Published in Journal of Economic Dynamics and Control, Elsevier, 2002, 26 (11), pp.1901--1926. ⟨10.1016/S0165-1889(01)00013-6⟩

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DOI: 10.1016/S0165-1889(01)00013-6

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