Department of Economics
University of Delaware
Working Paper #2007-17

Chaos and Sector-Specific Externalities

David R. Stockman

ABSTRACT

Benhabib and Farmer (1996) explore the possibility of local indeterminacy in a twosector model with sector-speci c externalities. They nd that very small sector-specific externalities are su cient for local indeterminacy. In this case, it is possible to construct sunspot equilibria where extrinsic uncertainty matters. In this paper, I provide a global analysis of their model revealing the existence of Euler equation branching. This branching allows for regime switching equilibria with cycles and chaotic behavior. These equilibria occur whether the \local dynamics" are determinate or indeterminate.

Keywords: two-sector model, regime switching, global indeterminacy, cycles and chaos.

JEL: E13, E32, E62.