Indeterminacy And Business-Cycle Fluctuations In A Two-Sector Economy With Externalities

The authors consider a two-sector economy with money-in-the-utility-function and sector-specific externalities. They provide conditions on technologies leading to the existence of local indeterminacy for any value of the interest rate elasticity of money demand, pro-vided the elasticity of intertemporal substitution in consumption is large enough. Moreover, they show that the occurrence of multiple equilibria is intimately linked with the existence of a flip bifurcation and period-two cycles. Endogenous business-cycle fluctuations through the existence of local indeterminacy are known to occur in monetary growth models in which the central bank is assumed to follow an exogenous money growth rule.