Essays on equilibrium indeterminacy in an open economy

It has been known that in dynamic general equilibrium economies equilibria may be indeterminate. Recent literature began to exploit the existence of an indeterminate set of equilibria as a way of explaining macroeconomic data. Especially, the literature that uses indeterminacy to understand business cycles is much developed in closed and open economies.;Starting from the pioneer work of Benhabib and Farmer (1994) who point out that increasing returns can be a source of indeterminacy in RBC models, several authors use different methods to reduce the magnitude of the increasing returns needed to generate indeterminacy, for instance, Weder (1996), Benhabib and Farmer (1996), Benhabib and Nishimura (1998), Wen (1998), Wen and Aguiar-Conraria (2005, 2006 henceforth WAC) and Harrison (1996). Wen (1998) uses the capacity utilization rate to reduce the degree of increasing returns in Benhabib and Farmer (1994). WAC (2005, 2006) use the third production factor to reduce the degree of increasing returns in one sector model. Others use two sector models to reduce the magnitude of the increasing returns. Except that WAC (2005, 2006) extend the Benhabib and Farmer (1994) into open economy by introducing the third production factor, say oil, other models are confined within closed economy.;The increasing returns that we discuss so far, refer to the ones in the production side, there are another class of models in which there are "fiscal increasing returns". Those models include Blanchard and Summers (1987), Velasco (1996) and Schmitt-Grohe and Uribe (1997, henceforth SGU). All of them emphasize that in order to generate indeterminacy, we need set the government expenditure to be constant and allow the tax rate to be determined endogenously. Particularly, the model of SGU (1997) includes labor income taxes, and generates two steady states. The labor market effects in their model are similar to those of Benhabib and Farmer (1994) with upward sloping labor demand curves.;Benhabib and Farmer (1999) provide five sources of indeterminacy in closed and open economies. Tariff as a kind of transaction costs in international trade belongs to the second category that they mentioned.;SGU (1997) prove that in a standard neoclassical growth model the fiscal increasing returns induced by the endogenous factor income tax rate (assuming that the government expenditure is exogenous) has a close correspondence with the production increasing returns in Benhabib and Farmer (1994) model. WAC (2005, 2006) extend the Benhabib-Farmer model to open economy by introducing imported foreign production factors. In Chapter 1, we prove that in a modified WAC model without increasing returns, using the tariff revenue from the imported production factor to finance the exogenous government expenditure, we can also have indeterminacy. From this perspective, factor income tax and tariff share similar channels to generate indeterminacy. The intuition for endogenous factor income taxes and tariff to generate indeterminacy is that both of them are countercyclical with respect to the output.;In chapter 2, we extend our former research on indeterminacy to a small open economy RBC model, in the way of relaxing the assumption that all the revenues from imposing tariffs are consumed by the government. Instead, we let all of the revenues returned to the agent in the form of lump-sum transfers and validate that the indeterminacy result is robust to this extension as long as the government revenue is exogenous.;In chapter 3, we investigate the implications of a balanced budget rule for the propagation of sunspots and fundamental shocks in the discrete time version of our tariff model. The main result is that neither the first-order serial correlations, the contemporanous correlations with output, nor the standard deviation relative to output of tariffs, output, hours, and consumption is affected by the relative volatility of the sunspot shock or its correlation with the technology shock.;In chapter 4, we analyze the relationship among the utility function form, curvature and indeterminacy in a small open economy two sector model, concluding that the independence between curvature and indeterminacy in open economy is robust to three kinds of commonly used utility functions. The Bennett and Farmer utility function is exceptional since the conclusion also depends on the form of endogenous time preference.