Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/51659 
Year of Publication: 
2011
Series/Report no.: 
IZA Discussion Papers No. 5603
Publisher: 
Institute for the Study of Labor (IZA), Bonn
Abstract: 
We provide a methodology to study the role of market distortions on the emergence of indeterminacy and bifurcations. Most of the specific market imperfections considered in the related literature are particular cases of our framework. Comparing them we obtain several equivalence results in terms of local dynamic properties, highlighting the main channels and classes of distortions responsible for indeterminacy. Our methodology consists in introducing general specifications for the elasticities of the crucial functions defining the aggregate equilibrium dynamics of the model. This allows us to study how market distortions influence the range of values for the elasticity of inputs substitution under which local indeterminacy and bifurcations occur. Applying this methodology to the Woodford (1986) framework we find that distortions in the capital market, per se, do not play a major role. We further show that, for empirically plausible values of elasticity of substitution between inputs, indeterminacy requires a minimal degree of distortions. This degree seems to be high under output market distortions, while with labor market distortions the required degree is empirically plausible.
Subjects: 
indeterminacy
endogenous fluctuations
market imperfections
externalities
imperfect competition
taxation
JEL: 
C62
E32
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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