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Liquitity Constraints, Heterogeneous Households and Sunspots Fluctuations

Author

Listed:
  • Jean-Paul Barinci

    (EPEE - Université d’Evry Val d’Essonne and EUREQua - Université Paris 1)

  • Arnaud Chéron

    (GAINS - Université du Mans and CEPREMAP)

  • François Langot

    (CEPREMAP and GAINS - Université du Mans)

Abstract

This paper is concerned with the empirical relevance of indeterminacy and sunspots in explaining the business cycle. It argues that limited borrowing opportunities provide a propagation mechanism able to generate business cycle facts observed in data in response to sunspot shocks. This point is demonstrated using an equilibrium business cycle model featuring heterogeneous households, endogenous labor supply and liquidity constraints. We first show that, due to a complementarity between individual labor supplies, the model exhibits indeterminacy for roughly constant returns to scale. We then establish that our model accounts for stylized facts that neither the standard RBC model nor previous sunspots models have been able to capture. More specifically, the model driven by sunspots alone matches the procyclical movements in aggregate consumption, and the positively correlated forecastable changes of basic macroeconomic variables.

Suggested Citation

  • Jean-Paul Barinci & Arnaud Chéron & François Langot, 2002. "Liquitity Constraints, Heterogeneous Households and Sunspots Fluctuations," Documents de recherche 02-17, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
  • Handle: RePEc:eve:wpaper:02-17
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    References listed on IDEAS

    as
    1. Benhabib, Jess & Farmer, Roger E.A., 1999. "Indeterminacy and sunspots in macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 6, pages 387-448, Elsevier.
    2. Benhabib, Jess & Farmer, Roger E. A., 1996. "Indeterminacy and sector-specific externalities," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 421-443, June.
    3. Benhabib, Jess & Rogerson, Richard & Wright, Randall, 1991. "Homework in Macroeconomics: Household Production and Aggregate Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1166-1187, December.
    4. Basu, Susanto & Fernald, John G, 1997. "Returns to Scale in U.S. Production: Estimates and Implications," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 249-283, April.
    5. Farmer Roger E. A. & Guo Jang-Ting, 1994. "Real Business Cycles and the Animal Spirits Hypothesis," Journal of Economic Theory, Elsevier, vol. 63(1), pages 42-72, June.
    6. Woodford, Michael, 1986. "Stationary sunspot equilibria in a finance constrained economy," Journal of Economic Theory, Elsevier, vol. 40(1), pages 128-137, October.
    7. Barinci, Jean-Paul & Cheron, Arnaud, 2001. "Sunspots and the Business Cycle in a Finance Constrained Economy," Journal of Economic Theory, Elsevier, vol. 97(1), pages 30-49, March.
    8. Schmitt-Grohe, Stephanie, 1997. "Comparing Four Models of Aggregate Fluctuations due to Self-Fulfilling Expectations," Journal of Economic Theory, Elsevier, vol. 72(1), pages 96-147, January.
    9. Rotemberg, Julio J & Woodford, Michael, 1996. "Real-Business-Cycle Models and the Forecastable Movements in Output, Hours, and Consumption," American Economic Review, American Economic Association, vol. 86(1), pages 71-89, March.
    10. Tullio Jappelli, 1990. "Who is Credit Constrained in the U. S. Economy?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(1), pages 219-234.
    11. Wen, Yi, 1998. "Capacity Utilization under Increasing Returns to Scale," Journal of Economic Theory, Elsevier, vol. 81(1), pages 7-36, July.
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    Cited by:

    1. Hahn, Volker, 2014. "Transparency In Monetary Policy, Signaling, And Heterogeneous Information," Macroeconomic Dynamics, Cambridge University Press, vol. 18(2), pages 369-394, March.

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    More about this item

    Keywords

    Heterogeneity; liquidity constraints; sunspots; increasing returns;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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