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Market Distortions and Local Indeterminacy: A General Approach

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  • Lloyd-Braga, Teresa

    (Católica Lisbon)

  • Modesto, Leonor

    (Universidade Catolica Portuguesa, Lisbon)

  • Seegmuller, Thomas

    (GREQAM, University of Aix-Marseille)

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.

Suggested Citation

  • Lloyd-Braga, Teresa & Modesto, Leonor & Seegmuller, Thomas, 2011. "Market Distortions and Local Indeterminacy: A General Approach," IZA Discussion Papers 5603, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp5603
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    Cited by:

    1. Gao, Yang & Gong, Gang, 2020. "Stabilizing and destabilizing mechanisms: A new perspective to understand business cycles," Economic Modelling, Elsevier, vol. 93(C), pages 51-68.
    2. Nishimura, Kazuo & Seegmuller, Thomas & Venditti, Alain, 2015. "Fiscal policy, debt constraint and expectations-driven volatility," Journal of Mathematical Economics, Elsevier, vol. 61(C), pages 305-316.
    3. Manjira Datta & Kevin Reffett & Łukasz Woźny, 2018. "Comparing recursive equilibrium in economies with dynamic complementarities and indeterminacy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 66(3), pages 593-626, October.
    4. Kevin X.D. Huang & Qinglai Meng & Jianpo Xue, 2019. "Capital Income Taxation and Aggregate Instability," Vanderbilt University Department of Economics Working Papers 19-00007, Vanderbilt University Department of Economics.
    5. Dos Santos Ferreira, Rodolphe & Lloyd-Braga, Teresa & Modesto, Leonor, 2015. "The destabilizing effects of the social norm to work under a social security system," Mathematical Social Sciences, Elsevier, vol. 76(C), pages 64-72.
    6. Carli, Francesco & Lloyd-Braga, Teresa & Modesto, Leonor, 2024. "Imperfect competition in the banking sector and economic instability," Journal of Mathematical Economics, Elsevier, vol. 112(C).
    7. Marta Aloi & Teresa Lloyd-Braga & Manuel Leite-Monteiro, 2017. "Welfare benefit reforms and employment," Discussion Papers 2017/02, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    8. Kevin x.d. Huang & Qinglai Meng & Jianpo Xue, 2019. "Capital Income Taxation and Aggregate Instability," Vanderbilt University Department of Economics Working Papers 19-00007, Vanderbilt University Department of Economics.
    9. Dos Santos Ferreira, Rodolphe & Lloyd-Braga, Teresa & Modesto, Leonor, 2014. "Employment Dynamics and Redistributive Policies under Workers' Social Norms," IZA Discussion Papers 7888, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    endogenous fluctuations; market imperfections; externalities; indeterminacy; imperfect competition; taxation;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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