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INDETERMINACY IN A ONE-SECTOR MODEL REVISITED: DEMAND VERSUS SUPPLY-SIDE INDETERMINACY

This paper explains how indeterminacy in a one-sector model may arise due to externalities in the disutility of labor supply, which is termed as demand-side indeterminacy. This contrasts supply-side indeterminacy that is driven by externalities in the production function as exemplified by Benhabib and Farmer (Journal of Economic Theory, 1994). For the one-sector models considered, I find that indeterminacy arises more easily from the demand than from the supply side. In addition, demand and supply-side indeterminacy generate different cyclical patterns of wages, a feature that is useful for identifying episodes of self-fulfilling prophecies within the two types of indeterminacy.
Year of publication:
2009
Authors: SIM, NICHOLAS C. S.
Published in:
The Singapore Economic Review (SER). - World Scientific Publishing Co. Pte. Ltd., ISSN 1793-6837. - Vol. 54.2009, 02, p. 183-196
Publisher: World Scientific Publishing Co. Pte. Ltd.
Subject: Indeterminacy | one-sector | self-fulfilling prophecies | business cycle
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