Multiple Equilibrium, Variability, and the Development Process
28 Pages Posted: 15 Feb 2006
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: Suggested Citation
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