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Increasing returns and unsynchronized wage adjustment in sunspot models of the business cycle

Huang, Kevin X.D. and Meng, Qinglai 2012, Increasing returns and unsynchronized wage adjustment in sunspot models of the business cycle, Journal of economic theory, vol. 147, no. 1, pp. 284-309, doi: 10.1016/j.jet.2011.10.013.

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Title Increasing returns and unsynchronized wage adjustment in sunspot models of the business cycle
Author(s) Huang, Kevin X.D.
Meng, Qinglai
Journal name Journal of economic theory
Volume number 147
Issue number 1
Start page 284
End page 309
Total pages 26
Publisher Elsevier
Place of publication Amsterdam, The Netherlands
Publication date 2012-01
ISSN 0022-0531
1095-7235
Keyword(s) Increasing returns
Relative wage
Risk aversion in labor
Indeterminacy
Summary A challenge to models of equilibrium indeterminacy based on increasing returns is that required increasing returns for generating indeterminacy can be implausibly large and rise quickly with the relative risk aversion in labor. We show that unsynchronized wage adjustment via a relative wage effect can both lower the required degree of increasing returns for indeterminacy to a plausible level and make it invariant to the relative risk aversion in labor. Consequently, indeterminacy and sunspot-driven fluctuations can emerge for plausible increasing returns regardless of the relative risk aversion in labor. Our model generates reasonable dynamics in terms of matching the business cycle, and sunspot shocks become more important with labor market friction.
Language eng
DOI 10.1016/j.jet.2011.10.013
Field of Research 140199 Economic Theory not elsewhere classified
1401 Economic Theory
Socio Economic Objective 970114 Expanding Knowledge in Economics
HERDC Research category C1.1 Refereed article in a scholarly journal
ERA Research output type C Journal article
Copyright notice ©2011, Elsevier Inc.
Persistent URL http://hdl.handle.net/10536/DRO/DU:30083622

Document type: Journal Article
Collection: Department of Economics
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