On sunspot fluctuations in variable capacity utilization models

Frederic Dufourt (1) , Alain Venditti (1) , Rémi Vivès (1)

1 AMSE - Aix-Marseille Sciences Economiques

We investigate the extent to which standard one sector RBC models with positive externalities and variable capacity utilization can account for the large hump-shaped response of output when the model is submitted to a pure sunspot shock. We refine the Benhabib and Wen (2004) model considering a general type of additive separable preferences and a general production function. We provide a detailed theoretical analysis of local stabilities and local bifurcations as a function of various structural parameters. We show that, when labor is infinitely elastic, local indeterminacy occurs through Flip and Hopf bifurcations for a large set of values for the elasticity of intertemporal substitution in consumption, the degree of increasing returns to scale and the elasticity of capital-labor substitution. Finally, we provide a detailed quantitative assessment of the model and conclude with mixed results. We show that although the model is able theoretically to generate a hump-shaped dynamics of output following an i.i.d. sunspot shock under realistic parameter values, the hump is too persistent for the model to be considered fully satisfactory from an empirical point of view.

Domains: Humanities and Social Sciences; Economics and Finance; Quantitative Finance [q-fin]; Mathematics [math]

Frederic Dufourt, Alain Venditti, Rémi Vivès. On sunspot fluctuations in variable capacity utilization models. Journal of Mathematical Economics, 2018, 76 (C), pp.80-94. ⟨10.1016/j.jmateco.2018.03.003⟩. ⟨hal-01729346⟩