Multiple Equilibrium, Variability, and the Development Process

28 Pages Posted: 15 Feb 2006

See all articles by Luis Carranza

Luis Carranza

University of Navarra

José Galdón-Sánchez

affiliation not provided to SSRN

Date Written: April 1998

Abstract

Per capita output is more volatile in middle-income economies than in both low-income and high-income economies. We examine this pattern in a two-period overlapping generations model with two productive sectors (a developed sector and a subsistence sector) and a credit sector. In the early and mature stages of development, there is a unique equilibrium, because labor and credit markets are cleared by a unique set of prices. In the middle stages of development, however, the model shows that markets can be cleared by a multiple set of prices. This multiplicity of equilibria arises as productive externalities are reflected in credit markets.

Keywords: Multiple equilibrium, externalities, market imperfections, development, sunspot equilibrium, credit market

JEL Classification: E00, 011, 016, 040

Suggested Citation

Carranza, Luis and Galdón-Sánchez, José, Multiple Equilibrium, Variability, and the Development Process (April 1998). IMF Working Paper No. 98/62, Available at SSRN: https://ssrn.com/abstract=882332

Luis Carranza (Contact Author)

University of Navarra ( email )

School of Business and Economics
Campus Universitario
Pamplona 31080, Navarra
Spain
+34948425625 (Phone)
+34948425626 (Fax)

José Galdón-Sánchez

affiliation not provided to SSRN

No Address Available