Sunspot Fluctuations in Two-Sector Models with Variable Income Effects

We analyze a version of the Benhabib and Farmer [3] two-sector model with sector-specific externalities in which we consider a class of utility functions inspired from the one considered in Jaimovich and Rebelo [14] which is flexible enough to encompass varying degrees of income effect. First, we show that local indeterminacy and sunspot fluctuations occur in 2-sector models under plausible configurations regarding all structural parameters – in particular regarding the intensity of income effects. Second, we prove that there even exist some configurations for which local indeterminacy arises under any degree of income effect. More precisely, for any given size of income effect, we show that there is a non-empty range of values for the Frisch elasticity of labor and the elasticity of intertemporal substitution in consumption such that indeterminacy occurs. This contrasts with the results obtained in one-sector models in both Nishimura et al. [19], in which it is shown that indeterminacy cannot occur under either GHH and KPR preferences, and in Jaimovich [13] in which local indeterminacy only arises for intermediary income effects

Expectational Stability of Sunspot Equilibria in Non-Convex Economies

We examine the stability under learning (E-stability) of sunspot equilibria in non-convex real business cycle models. The production technology is Cobb- Douglas with externalities generated by factor inputs. We establish that, with a general utility function, the well-known Benhabib-Farmer condition (Benhabib and Farmer, 1994) – that the labor-demand curve is upward-sloping and steeper than the Frisch labor-supply curve – is necessary for joint indeterminacy and E-stability. Then, with a separable utility function and allowing for negative externalities from capital inputs, we discover large regions in parameter space corresponding to stable indeterminacy, that is, learnable sunspot equilibria. These existence results overturn the conventional wisdom that sunspot equilib- ria in RBC-type models are inherently unstable, and provide concise closure to the stability puzzle of Evans and McGough (2005b).Keywords: Expectational stability, Real business cycle models, Externalities, Preferences, IndeterminacyKeywords: Expectational stability, Real business cycle models, Externalities, Preferences, Indeterminac

Externalities in R&D: a route to endogenous fluctuations

Technological progress produces both positive and negative economy wide externalities. Although positive spillovers seem to prevail most of the times, there is evidence and logical arguments revealing that investment in R&D can exceed the corresponding socially optimal level. Taking on board the assumption that the two kinds of externalities are possible and that, therefore, one is able to define the pace of technical progress required to maximize social welfare, we develop a standard two-sector optimal growth model with externalities in the production of technology. The added assumption allows for introducing endogenous business cycles in the Walrasian growth setup. The undertaken stability analysis discusses the local properties of a difference equation two-dimensional system, identifying the occurrence of a flip bifurcation, and looks at global dynamics, through a numerical example, in order to better illustrate and describe the non linear nature of the system.Technology; Externalities; Endogenous business cycles; Two-sector growth models; Nonlinear dynamics and chaos

Essays in expectation driven business cycle and wage polarization

Doctor of PhilosophyDepartment of EconomicsWilliam F. BlankenauThis dissertation investigates two essential features of the US economy. First, it explores how news about future productivity changes business cycle fluctuations. Using the a representative agent model, it shows that implementation labor in workplace organization could be an important channel through which news about the fundamentals can realistically generate US business cycle fluctuations. Further this idea is extended using the perspective of sunspot fluctuations. In particular, the model can lead to multiple equilibria under specific parameterizations. Second, a general equilibrium model has been developed with heterogeneous agents to explain the wage polarization feature of the US labor market, particularly how the price of an important technology is connected to lifetime earnings of agents and affects their college decisions. The following summarizes the three chapters of my dissertation. The first chapter which I co-authored with Dr. Blankenau, argues that purchasing investment goods does not directly increase the productive capacity of a business. Changes in the business through the installation of capital, worker training, and workplace reorganization are often required. These changes themselves are not easily automated. Change requires workers. We build a model where investment requires a complementary labor input. This mechanism is embedded in a representative agent model with capacity utilization, adjustment costs, and separable preferences. We show that this environment can yield positive co-movement between consumption, investment, and labor hours when the economy experiences a news shock about future productivity, thus providing an additional channel through which news shocks can generate key business cycle features. The second chapter is an extension of the first chapter. I investigate the indeterminacy in a representative agent model with implementation labor and increasing returns in production. First, my analysis shows that a representative agent with implementation labor can exhibit increasing returns to scale. Then I show that self-fulfilling beliefs of agents lead to business cycle fluctuations in which multiple equilibria can arise under specific parameterizations. Specifically, implementation labor in the production of capital is the highly important, necessary condition for the self-fulling equilibrium outcome. The third chapter, which is also a joint work with Dr. Blankenau, discusses the wage polarization feature of the US labor market. We build a general equilibrium model with heterogeneous agents, showing how wage polarization can emerge when the price of computer capital falls. Consequently, we find the share of the population with a college degree decreases. Our findings are consistent with recent empirical data that show a U-shaped wage growth pattern in the US as well as a slower growth rate of college-educated workers despite the high returns of investing in education. In the model, we assume that each agent is born with a portfolio of skills. Specifically, each agent can provide manual labor, routine labor, and abstract labor and must decide how much of each to provide. An agent can increase efficiency in all types of labor by attending college. All three types of labor are valued in the labor market at an endogenously determined wage rate. Computer capital is a substitute for routine labor. As its price falls and its quantity increases, agents with a relative aptitude for routine labor no longer find it advantageous to attend college. Since routinization of tasks harms middle-income agents, the model has government policy implications for observed wage polarization

Sentiments

This paper develops a new theory of fluctuations—one that helps accommodate the notions of “animal spirits” and “market sentiment” in unique-equilibrium, rational-expectations, macroeconomic models. To this goal, we limit the communication that is embedded in a neoclassical economy by allowing trading to be random and decentralized. We then show that the business cycle may be driven by a certain type of extrinsic shocks which we call sentiments. These shocks formalize shifts in expectations of economic activity without shifts in the underlying preferences and technologies; they are akin to sunspots, but operate in unique-equilibrium models. We further show how communication may help propagate these shocks in a way that resembles the spread of fads and rumors and that gives rise to boom-and-bust phenomena. We finally illustrate the quantitative potential of our insights within a variant of the RBC model

What does a technology shock do? A VAR analysis with model-based sign restrictions

This paper estimates the effects of technology shocks in VAR models of the U.S., identified by imposing restrictions on the sign of impulse responses. These restrictions are consistent with the implications of a popular class of DSGE models, with both real and nominal frictions, and with sufficiently wide ranges for their parameterers. This identification strategy thus substitutes theoretically-motivated restrictions for the atheoretical assumptions on the time-series properties of the data that are key to long-run restrictions. Stochastic technology improvements persistently increase real wages, consumption, investment and output in the data; hours worked are very likely to increase, displaying a hump-shaped pattern. Contrary to most of the related VAR evidence, results are not sensitive to a number of specification assumptions, including those on the stationarity properties of variables. JEL Classification: C3, E3Bayesian VAR methods, DSGE Models, Identification, Technology shocks

Essays in multiple equilibria in macroeconomics

This thesis studies three topics in multiple equilibria in macroeconomics as summarized below. Chapter 1 studies whether large transitory shocks can have permanent effects on economic outcomes in an application to international economics. I propose an open economy model with overlapping generations that displays multiple equilibria. I find that large transitory shocks can have permanent effects on economic welfare as the result of self-fulfilling beliefs about future prices. In addition, I develop an application of the Negishi method in a general equilibrium model with overlapping generations. Chapter 2 studies conditions for multiplicity of steady states in an infinite-horizon open economy model with a perpetual-youth demographic structure. I derive conditions for the multiplicity of steady states and I analyze the dynamic properties of such steady states. I find that when three steady states exist, two of them are locally determinate and one is dynamically unstable. Chapter 3 asks whether models where aggregate demand is driven by changes in beliefs can explain the unemployment data during the U.S. Great Depression. We propose two model specifications where unemployment is determined by aggregate demand and aggregate demand is driven by self-fulfilling beliefs about either investment or the value of the stock market, respectively. We then compare these specifications against a Real Business Cycle model using Bayesian techniques. We find that the data favour the specification where aggregate demand is driven by agents beliefs about aggregate investment. v