Global Indeterminacy in Locally Determinate RBC Models

Abstract

We investigate the global dynamics of RBC models with production externalities. We confirm that purely local analysis does not tell the full story. With externalities smaller than required for local indeterminacy, local analysis shows the steady state to be a saddle, implying a unique equilibrium. But global analysis reveals the steady state is surrounded by stable deterministic cycles. Our analysis suggests that indeterminacy is more robust than previously realized, and the results strengthen the view that caution should be exercised when linearized versions of this class of RBC models are used in applied work.

Keywords: Global Indeterminacy, Real Business Cycles, Sunspots, Chaos, Limit Cycles, Bifurcation Analysis

JEL Classification: C62, E13, E32