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EXPECTATIONS-DRIVEN FLUCTUATIONS WHEN FACTOR UTILIZATION IS VARIABLE

Published online by Cambridge University Press:  30 January 2004

PATRICK A. PINTUS
PATRICK A. PINTUS
Affiliation:
Université de la Méditerranée Aix-Marseille II and GREQAM
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Abstract

The present paper studies the influence of variable labor utilization on local indeterminacy and expectations-driven fluctuations, in one-sector models with (nearly) constant returns to scale. It is shown that, in comparison to the configuration of constant input utilization, considering variable utilization reduces the actual possibilities of factor substitution and, consequently, the range of input substitution elasticities that are compatible with endogenous fluctuations. In particular, local indeterminacy and expectations-driven fluctuations occur only if utilization rates are sufficiently inelastic, whereas local determinacy prevails when utilization is highly elastic. However, accounting for the fact that variable utilization reduces the effective elasticity of capital/labor substitution leads us to argue that expectations-driven fluctuations are more plausible because they require larger elasticities of apparent input substitution. In contrast with the recent literature, the analysis does not rely on significantly increasing returns to scale in production. Accordingly, the results are not at variance with recent empirical studies emphasizing the importance of variable utilization and denying the evidence of large increasing returns.

Keywords

Input UtilizationInput SubstitutionLocal IndeterminacyExpectations-Driven FluctuationsLocal Bifurcations
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 8 , Issue 1 , February 2004 , pp. 3 - 26
Copyright
© 2004 Cambridge University Press

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