Chapter

Multiple Equilibria in a Dynamic Two Country Model

Kazumichi Iwasa and Kazuo Nishimura

in Dimensions of Economic Theory and Policy

Published in print October 2011 | ISBN: 9780198073970
Published online September 2012 | e-ISBN: 9780199081615 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780198073970.003.0005
Multiple Equilibria in a Dynamic Two Country Model

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Some market distortional factors such as factor-generated externalities and imperfect competition can give rise to multiple equilibrium paths, or indeterminacy, in dynamic general equilibrium models. Despite numerous studies on indeterminacy in two-country models, it is assumed that either market distortional factors or inferiority in consumption (one good is an inferior good at the steady state) will make indeterminacy possible. This chapter considers a dynamic two-country model with technological differences and illustrates how indeterminacy can arise even without any market distortional factor and inferiority in consumption. In cases where a pure consumption good is more labour-intensive than a consumable capital good, the chapter demonstrates that multiple equilibrium paths arise when the former is inferior. In cases where a pure consumption good is more capital-intensive than a consumable capital good, multiple equilibrium paths can arise even when both goods are normal.

Keywords: indeterminacy; two-country models; market distortional factors; externalities; imperfect competition; multiple equilibrium paths; pure consumption good; consumable capital good

Chapter.  3100 words. 

Subjects: Microeconomics

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