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Does the utility function form matter for indeterminacy in a two sector small open economy?

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  • Zhang, Yan
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    Abstract

    In his paper "Does utility curvature matter for indeterminacy", Kim (2005) analyzed the relationship among the utility function form, curvature and indeterminacy, concluding that the relationship between curvature and indeterminacy is not robust in neoclassical growth model and the indeterminacy may disappear under the utility specification as in Greenwood et.al (1998). The models he discussed are confined within one sector closed economy. Weder (2001), Meng and Velasco (2004) extend the Benhabib and Farmer (1996) and Benhabib and Nishimura (1998)'s closed economy two sector models into open economy, showing that indeterminacy can occur under small external effects, independently of the intertemporal elasticities in consumption. Meng and Velasco (2003) went further, showing the independence between the elasticity of labor supply and indeterminacy in open economy. Under nonseparable utility forms like in King, Plosser and Rebelo (1988, henceforth KPR) or Bennett-Farmer (2000) form, do we still have this property? In other words, is the independence between curvature and indeterminacy in small open economy models robust to the specification of the utility functions? In this note, I tackle this issue under two different versions of nonseparable utility functions commonly used in the literature. The answer is "yes" to KPR form but "no" to Bennett-Farmer form. Endogenous time preference and consumable nontradable goods are two elements to deliver this result.

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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10045.

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    Date of creation: May 2008
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    Handle: RePEc:pra:mprapa:10045

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    Keywords: Indeterminacy; Endogenous time preference;

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    1. Weder, Mark, 2001. "Indeterminacy in a Small Open Economy Ramsey Growth Model," Journal of Economic Theory, Elsevier, Elsevier, vol. 98(2), pages 339-356, June.
    2. Qinglai Meng & Andrés Velasco, 2003. "Indeterminacy in a small open economy with endogenous labor supply," Economic Theory, Springer, Springer, vol. 22(3), pages 661-669, October.
    3. Meng, Qinglai & Velasco, Andres, 2004. "Market imperfections and the instability of open economies," Journal of International Economics, Elsevier, Elsevier, vol. 64(2), pages 503-519, December.
    4. Bennett, Rosalind L. & Farmer, Roger E. A., 2000. "Indeterminacy with Non-separable Utility," Journal of Economic Theory, Elsevier, Elsevier, vol. 93(1), pages 118-143, July.
    5. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, Elsevier, vol. 61(1), pages 163-185, October.
    6. Hintermaier, Thomas, 2003. "On the minimum degree of returns to scale in sunspot models of the business cycle," Journal of Economic Theory, Elsevier, Elsevier, vol. 110(2), pages 400-409, June.
    7. Kim, Jinill, 2005. "Does utility curvature matter for indeterminacy?," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 57(4), pages 421-429, August.
    8. Benhabib, Jess & Nishimura, Kazuo, 1996. "Indeterminancy and Sunspots with Constant Returns," Working Papers, C.V. Starr Center for Applied Economics, New York University 96-44, C.V. Starr Center for Applied Economics, New York University.
    9. Benhabib, Jess & Farmer, Roger E.A., 1996. "Indeterminacy and Sector-Specific Externalities," Working Papers, C.V. Starr Center for Applied Economics, New York University 96-12, C.V. Starr Center for Applied Economics, New York University.
    10. Bian, Yong & Meng, Qinglai, 2004. "Preferences, endogenous discount rate, and indeterminacy in a small open economy model," Economics Letters, Elsevier, Elsevier, vol. 84(3), pages 315-322, September.
    11. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, American Economic Association, vol. 78(3), pages 402-17, June.
    12. Farmer Roger E. A. & Guo Jang-Ting, 1994. "Real Business Cycles and the Animal Spirits Hypothesis," Journal of Economic Theory, Elsevier, Elsevier, vol. 63(1), pages 42-72, June.
    13. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(2), pages 205-251, April.
    14. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 21(2-3), pages 195-232.
    15. Jess Benhabib & Roger E.A. Farmer, 1992. "Indeterminacy and Increasing Returns," UCLA Economics Working Papers, UCLA Department of Economics 646, UCLA Department of Economics.
    16. 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.
    17. Enrique G. Mendoza & Martin Uribe, 1999. "The Business Cycles of Balance-of-Payment Crises: A Revision of Mundellan Framework," NBER Working Papers 7045, National Bureau of Economic Research, Inc.
    18. Turnovsky Stephen J. & Sen Partha, 1995. "Investment in a Two-Sector Dependent Economy," Journal of the Japanese and International Economies, Elsevier, vol. 9(1), pages 29-55, March.
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    Cited by:
    1. Hu, Yunfang & Mino, Kazuo, 2013. "Trade structure and belief-driven fluctuations in a global economy," Journal of International Economics, Elsevier, Elsevier, vol. 90(2), pages 414-424.
    2. Yunfang Hu & Kazuo Mino, 2009. "Financial Integration and Aggregate Stability," Discussion Papers in Economics and Business 09-01, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).

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