Borrowing Constraint and Indeterminacy with Arbitrarily low Returns to Scale
This paper argues that a finance constrained economy populated by two classes of households with heterogeneous preferences, workers and capitalists, allows to overcome two traditional puzzles that feature the link between indeterminacy and macroeconomics. It will be shown that, according to the elasticity of substitution between the productive factors and the intertemporal elasticity of substitution of capitalists, the model can exhibit indeterminacy with degrees of increasing returns-to-scale consistent with the more recent estimates. In addition, it will be established that, in opposition to conventional endogenous business cycle models, fluctuations driven by sunspots are consistent with procyclical movements of aggregate consumption.
KeywordsBusiness Cycle Labor Demand Market Imperfection Aggregate Consumption Borrowing Constraint
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