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INDETERMINACY, BIFURCATIONS, AND UNEMPLOYMENT FLUCTUATIONS

Published online by Cambridge University Press:  01 April 2008

FRÉDÉRIC DUFOURT,
TERESA LLOYD-BRAGA and
LEONOR MODESTO
FRÉDÉRIC DUFOURT*
Affiliation:
Université Louis Pasteur, BETA
TERESA LLOYD-BRAGA
Affiliation:
Universidade Católica Portuguesa (UCP-FCEE) and CEPR
LEONOR MODESTO
Affiliation:
Universidade Católica Portuguesa (UCP-FCEE) and IZA
*
Address correspondence to: Frédéric Dufourt, Beta, UMR 7522 of CNRS, University Louis Pasteur, 61 Avenue de la Foret Noire F67085 Strasbourg, France; e-mail: dufourt@cournot.u-strasbg.fr.
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Abstract

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We incorporate imperfectly insured unemployment in the finance constrained economy proposed by Woodford (1986), by introducing unions and unemployment benefits financed by labor taxation. We show that this simple extension of the Woodford model changes drastically its stability conditions and local dynamics around the steady state. In fact, in contrast to related models in the literature, we find that, under constant returns to scale in production: (i) indeterminacy always prevails in the case of a unitary elasticity of substitution between capital and labor and (ii) flip and Hopf bifurcations occur for empirically credible elasticities of substitution between capital and labor, so that a rich set of dynamics may emerge at “realistic” parameters' values.

Keywords

Business CyclesIndeterminacyBifurcationsUnemployment

Information

Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 12 , Supplement S1: Dynamic Macroeconomic Theory , April 2008, pp. 75 - 89
Copyright
Copyright © Cambridge University Press 2008

References

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