Does the utility function form matter for indeterminacy in a two sector small open economy?
AbstractIn 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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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 10045.
Date of creation: May 2008
Date of revision:
Indeterminacy; Endogenous time preference;
Other versions of this item:
- Yan Zhang, 2008. "Does the Utility Function Form Matter for Indeterminacy in a Two Sector Small Open Economy," Annals of Economics and Finance, Society for AEF, vol. 9(1), pages 91-101, May.
- F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-09-05 (All new papers)
- NEP-DGE-2008-09-05 (Dynamic General Equilibrium)
- NEP-MAC-2008-09-05 (Macroeconomics)
- NEP-OPM-2008-09-05 (Open Economy Macroeconomics)
- NEP-UPT-2008-09-05 (Utility Models & Prospect Theory)
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