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Indeterminacy with Small Externalities: The Role of Non-Separable Preferences

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Lloyd-Braga, Teresa
Nourry, Carine
Venditti, Alain

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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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5541.

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Date of creation: Mar 2006
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Handle: RePEc:cpr:ceprdp:5541

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Related research
Keywords: capital and labour externalities endogenous cycles endogenous labour supply indeterminacy infinite-horizon model

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Find related papers by JEL classification:
C62 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Existence and Stability Conditions of Equilibrium
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Thomas HINTERMAIER, 2001. "Lower Bounds on Externalities in Sunspot Models," Economics Working Papers ECO2001/04, European University Institute. [Downloadable!]
  2. Pelloni, Alessandra & Waldmann, Robert, 1998. "Stability properties of a growth model," Economics Letters, Elsevier, vol. 61(1), pages 55-60, October. [Downloadable!] (restricted)
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  3. Benhabib Jess & Farmer Roger E. A., 1994. "Indeterminacy and Increasing Returns," Journal of Economic Theory, Elsevier, vol. 63(1), pages 19-41, June. [Downloadable!] (restricted)
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  4. Bennett, R.L. & Farmer, R.E.A., 1999. "Indeterminacy with Non-Separable Utility," Economics Working Papers eco99/34, European University Institute.
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  5. 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. [Downloadable!] (restricted)
  6. Duffy, John & Papageorgiou, Chris, 2000. " A Cross-Country Empirical Investigation of the Aggregate Production Function Specification," Journal of Economic Growth, Springer, vol. 5(1), pages 87-120, March. [Downloadable!] (restricted)
  7. Pintus, Patrick A., 2007. "Local determinacy with non-separable utility," Journal of Economic Dynamics and Control, Elsevier, vol. 31(2), pages 669-682, February. [Downloadable!] (restricted)
  8. Grandmont, Jean-Michel & Pintus, Patrick & de Vilder, Robin, 1998. "Capital-Labor Substitution and Competitive Nonlinear Endogenous Business Cycles," Journal of Economic Theory, Elsevier, vol. 80(1), pages 14-59, May. [Downloadable!] (restricted)
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  9. Patrick Pintus, 2006. "Indeterminacy with almost constant returns to scale: capital-labor substitution matters," Economic Theory, Springer, vol. 28(3), pages 633-649, 08. [Downloadable!] (restricted)
  10. Boldrin, Michele & Rustichini, Aldo, 1994. "Growth and Indeterminacy in Dynamic Models with Externalities," Econometrica, Econometric Society, vol. 62(2), pages 323-42, March. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jaime Alonso-Carrera & Jordi caballe & Xavier Raurich, 2007. "Can Consumption Spillovers Be A Source Of Equilibrium Indeterminacy?," CAMA Working Papers 2007-13, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
    Other versions:
  2. Stefano Bosi & Francesco Magris & Alain Venditti, 2007. "Sunspot Fluctuations in Two-sector Economies with Heterogeneous Agents," Economic Theory, Springer, vol. 33(2), pages 311-331, November. [Downloadable!] (restricted)
  3. Jang-Ting Guo & Kevin J. Lansing, 2008. "Capital-labor substitution, equilibrium indeterminacy, and the cyclical behavior of labor income," Working Paper Series 2008-06, Federal Reserve Bank of San Francisco. [Downloadable!]
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