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2017 | OriginalPaper | Chapter

2. Indeterminacy in Real Business Cycle Models

Author : Kazuo Mino

Published in: Growth and Business Cycles with Equilibrium Indeterminacy

Publisher: Springer Japan

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Abstract

The baseline real business cycle (RBC) model is a stochastic optimal growth model with flexible labor supply. The typical driving force of business fluctuations is a technological shock hitting the total factor productivity (TFP) of the aggregate economy in each period. In RBC models with equilibrium determinacy, the economy never fluctuates in response to non-fundamental shocks that only affect expatiations of households and firms. As discussed in the previous chapter, the necessary condition for the existence of sunspot-driven business cycles is that the equilibrium path of the economy is indeterminate.

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Footnotes
1
As to this result, see the detailed investigations by Boldrin (1992) and Boldrin and Rustichini (1994).
 
2
The role of productive consumption is explored by Daito (2009), Steger (2002), and others.
 
3
There are two solutions of λ k .  We select one that corresponds to the stable saddle path.
 
4
A sample includes Abel (1990), Gali (1994), and Turnovsky and Monteiro (2007).
 
5
Remember that β > 1 + γ is necessary but not sufficient for indeterminacy. Eusepi (2009) implicitly assumed that determinacy holds even under β > 1 + γ. 
 
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Metadata
Title
Indeterminacy in Real Business Cycle Models
Author
Kazuo Mino
Copyright Year
2017
Publisher
Springer Japan
Book
Growth and Business Cycles with Equilibrium Indeterminacy

Print ISBN: 978-4-431-55608-4

Electronic ISBN: 978-4-431-55609-1

Copyright Year: 2017

DOI
https://doi.org/10.1007/978-4-431-55609-1_2