Does Financial Development Amplify Sunspot Fluctuations?

Takuma Kunieda and Kazuo Nishimura

No 204, Discussion Paper Series from School of Economics, Kwansei Gakuin University

Abstract: Does financial development amplify or contract sunspot fluctuations? To address this question, we explore a two-sector dynamic general equilibrium model with financial frictions and sector-specific production externalities. We first derive a condition for indeterminacy of equilibria to occur, and then, a sunspot variable is introduced in the economy with financial frictions. The outcome shows that if labor intensity in the consumption good sector from the social perspective is very large, financial development is more likely to magnify sunspot fluctuations, whereas if labor intensity in the intermediate good sector from the social perspective is very large, financial development is more likely to contract sunspot fluctuations

Keywords: Two production sectors; financial frictions; sector-specific production externalities; sunspots (search for similar items in EconPapers)
JEL-codes: E32 E44 O41 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2020-02
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:kgu:wpaper:204

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