Local indeterminacy under dynamic efficiency in a two-sector overlapping generations economy
AbstractWe 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 eciency 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 scale 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  influential conclusion is a robust property in a two-sector OLG economy.
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Date of creation: 2009
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Two-sector OLG model; dynamic efficiency; gross substitutability in consumption; local indeterminacy; stabilization policy;
Other versions of this item:
- Nourry, Carine & Venditti, Alain, 2011. "Local indeterminacy under dynamic efficiency in a two-sector overlapping generations economy," Journal of Mathematical Economics, Elsevier, vol. 47(2), pages 164-169, March.
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