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Indeterminacy with small externalities: The role of non-separable preferences

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  • Teresa Lloyd-Braga
  • Carine Nourry
  • Alain Venditti

Abstract

In this paper we consider a Ramsey one-sector model with non-separable homothetic preferences, endogenous labour and productive external effects arising from average capital and labour. We show that indeterminacy cannot arise when there are only capital externalities but that it does when there are only labour external effects. We prove that sunspot fluctuations are fully consistent with small market imperfections and realistic calibrations for the elasticity of capital-labour substitution (including the Cobb-Douglas specification) provided the elasticity of intertemporal substitution in consumption and the elasticity of the labour supply are large enough.

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Bibliographic Info

Article provided by The International Society for Economic Theory in its journal International Journal of Economic Theory.

Volume (Year): 2 (2006)
Issue (Month): 3-4 ()
Pages: 217-239

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Handle: RePEc:bla:ijethy:v:2:y:2006:i:3-4:p:217-239

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References

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  1. Pelloni, A. & Waldmann, R., 1997. "Stability Properties in a Growth Model," Economics Working Papers, European University Institute eco97/11, European University Institute.
  2. Benhabib, J. & Farmer, R.E.A, 1991. "Indeterminacy and Increasing Returns," Papers, Cambridge - Risk, Information & Quantity Signals 165, Cambridge - Risk, Information & Quantity Signals.
  3. Michele Boldrin & Aldo Rustichini, 2010. "Growth and Indeterminacy in Dynamic Models with Externalities," Levine's Working Paper Archive 1382, David K. Levine.
  4. Pintus, Patrick A., 2007. "Local determinacy with non-separable utility," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 31(2), pages 669-682, February.
  5. GRANDMONT, Jean-Michel & PINTUS, Patrick & de VILDER, Robin, 1997. "Capital-labor substitution and competitive nonlinear endogenous business cycles," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 1997087, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. King, Robert G & Plosser, Charles I & Rebelo, Sergio T, 2002. "Production, Growth and Business Cycles: Technical Appendix," Computational Economics, Society for Computational Economics, Society for Computational Economics, vol. 20(1-2), pages 87-116, October.
  7. Hintermaier, Thomas, 2003. "On the minimum degree of returns to scale in sunspot models of the business cycle," Journal of Economic Theory, Elsevier, vol. 110(2), pages 400-409, June.
  8. Bennett, Rosalind L. & Farmer, Roger E. A., 2000. "Indeterminacy with Non-separable Utility," Journal of Economic Theory, Elsevier, vol. 93(1), pages 118-143, July.
  9. Benhabib, Jess & Farmer, Roger E.A., 1999. "Indeterminacy and sunspots in macroeconomics," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 6, pages 387-448 Elsevier.
  10. Duffy, John & Papageorgiou, Chris, 2000. " A Cross-Country Empirical Investigation of the Aggregate Production Function Specification," Journal of Economic Growth, Springer, Springer, vol. 5(1), pages 87-120, March.
  11. Patrick Pintus, 2006. "Indeterminacy with almost constant returns to scale: capital-labor substitution matters," Economic Theory, Springer, Springer, vol. 28(3), pages 633-649, 08.
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Cited by:
  1. Been-Lon Chen & Angus Chu, 2010. "On R&D spillovers, multiple equilibria and indeterminacy," Journal of Economics, Springer, Springer, vol. 100(3), pages 247-263, July.
  2. Francesco Busato & Enrico Marchetti, 2009. "Endogenous Skill Cycles," Working Papers, University of Rome La Sapienza, Department of Public Economics 127, University of Rome La Sapienza, Department of Public Economics.
  3. Jang-Ting Guo & Kevin J. Lansing, 2008. "Capital-Labor Substitution, Equilibrium Indeterminacy, and the Cyclical Behavior of Labor Income," Working Papers 200804, University of California at Riverside, Department of Economics, revised Apr 2008.
  4. Alonso-Carrera, Jaime & Caballé, Jordi & Raurich, Xavier, 2008. "Can consumption spillovers be a source of equilibrium indeterminacy?," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 32(9), pages 2883-2902, September.
  5. Carine Nourry & Thomas Seegmuller & Alain Venditti, 2011. "Aggregate instability under balanced-budget consumption taxes: a re-examination," Working Papers halshs-00633609, HAL.
  6. Francesco Busato & Enrico Marchetti, 2009. "Skills, sunspots and cycles," Journal of Economics, Springer, Springer, vol. 97(3), pages 189-215, July.
  7. Kazuo Nishimura & Alain Venditti, 2010. "Indeterminacy and expectation-driven uctuations with non-separable preferences," KIER Working Papers 702, Kyoto University, Institute of Economic Research.
  8. Francesco Busato & Bruno Chiarini & Enrico Marchetti, 2005. "Indeterminacy, Underground Activities and Tax Evasion," Working Papers 289, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  9. Guo, Jang-Ting & Lansing, Kevin J., 2009. "Capital-labor substitution and equilibrium indeterminacy," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 33(12), pages 1991-2000, December.
  10. Jean-Philippe Garnier, 2013. "Keeping-up with the Joneses, a new source of fluctuations in the two-sector continuous-time models," Working Papers hal-00991664, HAL.
  11. Magris, Francesco, 2012. "Indeterminacy and multiple steady states with sector-specific externalities," Economic Modelling, Elsevier, vol. 29(6), pages 2664-2672.
  12. Wong, Tsz-Nga & Yip, Chong K., 2010. "Indeterminacy and the elasticity of substitution in one-sector models," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 34(4), pages 623-635, April.
  13. Stefano Bosi & Francesco Magris & Alain Venditti, 2007. "Sunspot Fluctuations in Two-sector Economies with Heterogeneous Agents," Economic Theory, Springer, Springer, vol. 33(2), pages 311-331, November.

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