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Local indeterminacy under dynamic efficiency in a two-sector overlapping generations economy

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  • Nourry, Carine
  • Venditti, Alain

Abstract

Abstract We consider a two-sector two-periods overlapping generations model with inelastic labor, consumption in both periods of life and homothetic CES preferences. Assuming gross substitutability and a capital intensive consumption good, we prove that when dynamic efficiency holds, local indeterminacy and sunspot fluctuations occur with low enough values for the sectoral elasticities of capital-labor substitution and we illustrate this finding within a standard example. This result shows that some fiscal policy rules can prevent the existence of business-cycle fluctuations in the economy by driving it to the optimal steady state as soon as it is announced, and thus shows that Reichlin's (1986) influential conclusion is compatible with positive elasticities of capital-labor substitution in a two-sector OLG economy.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 47 (2011)
Issue (Month): 2 (March)
Pages: 164-169

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Handle: RePEc:eee:mateco:v:47:y:2011:i:2:p:164-169

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Web page: http://www.elsevier.com/locate/jmateco

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Keywords: Two-sector OLG model Dynamic efficiency Gross substitutability in consumption Local indeterminacy Stabilization policy;

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References

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  1. Guido Cazzavillan & Patrick Pintus, 2006. "Endogenous Business Cycles and Dynamic Inefficiency," Working Papers, Department of Economics, University of Venice "Ca' Foscari" 2006_37, Department of Economics, University of Venice "Ca' Foscari".
  2. Drugeon, Jean-Pierre & Nourry, Carine & Venditti, Alain, 2010. "On efficiency and local uniqueness in two-sector OLG economies," Mathematical Social Sciences, Elsevier, Elsevier, vol. 59(1), pages 120-144, January.
  3. Guido Cazzavillan & Patrick Pintus, 2006. "Dynamic Inefficiency in an Overlapping Generations Economy with Production," Working Papers, Department of Economics, University of Venice "Ca' Foscari" 2006_40, Department of Economics, University of Venice "Ca' Foscari".
  4. Jean-Michel Grandmont & P, A, Pintus & R, De Vilder, 1997. "Capital-Labor Substitution and Competitive Nonlinear Endogenous Business Cycles," Working Papers, Centre de Recherche en Economie et Statistique 97-28, Centre de Recherche en Economie et Statistique.
  5. Kazuo Nishimura & Tadashi Shigoka & Makoto Yano, 1998. "Interior Optimal Chaos with Arbitrarily Low Discount Rates," The Japanese Economic Review, Japanese Economic Association, Japanese Economic Association, vol. 49(3), pages 223-233, 09.
  6. Reichlin, Pietro, 1986. "Equilibrium cycles in an overlapping generations economy with production," Journal of Economic Theory, Elsevier, Elsevier, vol. 40(1), pages 89-102, October.
  7. Benhabib, Jess & Nishimura, Kazuo, 1981. "Stability of Equilibrium in Dynamic Models of Capital Theory," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 22(2), pages 275-93, June.
  8. Jean-Pierre Drugeon & Carine Nourry & Alain Venditti, 2006. "Does dynamic efficiency rule out sunspot fluctuations ?," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers), HAL halshs-00410787, HAL.
  9. Galor, Oded, 1992. "A Two-Sector Overlapping-Generations Model: A Global Characterization of the Dynamical System," Econometrica, Econometric Society, Econometric Society, vol. 60(6), pages 1351-86, November.
  10. Cremers, Emily, 2006. "Dynamic Efficiency in the Two-Sector Overlapping Generations Model," Staff General Research Papers, Iowa State University, Department of Economics 34856, Iowa State University, Department of Economics.
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Cited by:
  1. Antoine Le Riche & Carine Nourry & Alain Venditti, 2012. "Efficient Endogenous Fluctuations in Two-Sector OLG Model," AMSE Working Papers, Aix-Marseille School of Economics, Marseille, France 1242, Aix-Marseille School of Economics, Marseille, France, revised Dec 2012.
  2. Nourry, Carine & Venditti, Alain, 2012. "Endogenous Business Cycles In Overlapping-Generations Economies With Multiple Consumption Goods," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 16(S1), pages 86-102, April.

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