Endogenous Business Cycles and Liquidity Constraint

Stefano Bosi () and Francesco Magris
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Stefano Bosi: EPEE, Université d’Evry

No 99-18, Documents de recherche from Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne

Abstract: It is well known from the literature that the introduction of liquidity constraints in infinite-horizon economies may be responsible for the occurrence of local indeterminacy and sunspot fluctuations. Yet, the question of the robustness of such phenomena when the constraints are progressively relaxed, and the possibility of intertemporal arbitrage on the part of the agents increases, remains open. In this paper we study such an issue by departing from the Cazzavillan et al. (1998) framework with heterogeneous agents,financial constraint on wage income, and positive externalities in aggregate capital and labor. We observe that local indeterminacy and sunspot fluctuations persist for a wide range of amplitudes of the liquidity constraint, although they finally disappear when the ”degree” of liquidity of the economy is made arbitrarily large.

Keywords: Liquidity constraint; Indeterminacy; Sunspot equilibria (search for similar items in EconPapers)
JEL-codes: C61 E32 (search for similar items in EconPapers)
Pages: 30 pages
Date: 1999
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Persistent link: https://EconPapers.repec.org/RePEc:eve:wpaper:99-18

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