Indeterminacy with No-Income-Effect Preferences and Sector-Specific Externalities
AbstractWe examine a two-sector real business cycle model with sector-specific externalities in the production of distinct consumption and investment goods. In addition, the household utility is postulated to exhibit no income effect on the demand for leisure. Unlike in the one-sector counterpart, we show that equilibrium indeterminacy can result with sufficiently high returns-to-scale in the production of investment goods. We also find that the smaller the labor supply elasticity, the lower the threshold level of returns-to-scale needed for generating indeterminacy and sunspots. This finding turns out to be exactly the opposite of that in all existing RBC-based indeterminacy studies.
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Bibliographic InfoPaper provided by University of California at Riverside, Department of Economics in its series Working Papers with number 200809.
Length: 13 pages
Date of creation: Jul 2008
Date of revision: Jul 2008
Indeterminacy; Income Effect; Sector-Specific Externalities;
Other versions of this item:
- Guo, Jang-Ting & Harrison, Sharon G., 2010. "Indeterminacy with no-income-effect preferences and sector-specific externalities," Journal of Economic Theory, Elsevier, vol. 145(1), pages 287-300, January.
- Sharon Harrison & Jang-Ting Guo, 2008. "Indeterminacy with No-Income-Effect Preferences and Sector-Specifc Externalities," Working Papers 0801, Barnard College, Department of Economics.
- E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
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