Working Paper: CEPR ID: DP4874
Authors: Frdric Dufourt; Teresa Lloyd-Braga; Leonor Modesto
Abstract: We extend the finance-constrained economy proposed by Woodford (1986) to incorporate imperfectly insured unemployment, by introducing unions and unemployment benefits financed by labour 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 labour; (ii) flip and Hopf bifurcations occur for empirically credible elasticities of substitution between capital and labour, so that a rich set of dynamics may emerge at ?realistic? parameters? values.
Keywords: bifurcations; endogenous fluctuations; imperfectly insured unemployment; indeterminacy
JEL Codes: E24; E32; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Introduction of unions and unemployment benefits financed by labor taxation (J51) | Alters the stability conditions of the Woodford model (E19) |
| Elasticity of substitution between capital and labor is unitary (D24) | Indeterminacy becomes a permanent feature of the economy (D59) |
| Empirically credible elasticities of substitution (D12) | Model can exhibit flip and Hopf bifurcations (C69) |