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Indeterminacy and expectation-driven uctuations with non-separable preferences

  • Kazuo Nishimura

    (Institute of Economic Research, Kyoto University)

  • Alain Venditti

    (CNRS - GREQAM and EDHEC)

We consider a continuous-time two-sector infinite-horizon model with sector specific externalities, endogenous labor and a concave homogeneous non-separable utility function. We show that local indeterminacy arises with a low elasticity of intertempo- ral substitution in consumption provided the wage elasticity of the labor supply and the elasticity of substitution between consumption and leisure are low enough. Such a result cannot hold with additively-separable preferences for which local indeterminacy requires a large enough elasticity of intertemporal substitution in consumption.

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Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 702.

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Length: 27pages
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:kyo:wpaper:702
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  1. Kazuo Nishimura & Carine Nourry & Alain Venditti, 2008. "Indeterminacy in aggregate models with small externalities: an interplay between preferences and technology," Working Papers halshs-00281428, HAL.
  2. Jean-Philippe Garnier & Kazuo Nishimura & Alain Venditti, 2007. "Intertemporal Substitution In Consumption, Labor Supply Elasticity And Sunspot Fluctuations In Continuous-Time Models," Working Papers halshs-00352367, HAL.
  3. Nishimura, Kazuo, 1985. "Competitive equilibrium cycles," Journal of Economic Theory, Elsevier, vol. 35(2), pages 284-306, August.
  4. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : II. New directions," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 309-341.
  5. Benhabib, Jess & Farmer, Roger E.A., 1999. "Indeterminacy and sunspots in macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 6, pages 387-448 Elsevier.
  6. Harrison, Sharon G., 2001. "Indeterminacy in a model with sector-specific externalities," Journal of Economic Dynamics and Control, Elsevier, vol. 25(5), pages 747-764, May.
  7. Mino, Kazuo, 1999. "Non-separable utility function and indeterminacy of equilibrium in a model with human capital," Economics Letters, Elsevier, vol. 62(3), pages 311-317, March.
  8. Guo, Jang-Ting & Lansing, Kevin J., 2009. "Capital-labor substitution and equilibrium indeterminacy," Journal of Economic Dynamics and Control, Elsevier, vol. 33(12), pages 1991-2000, December.
  9. Jess Benhabib & Roger E.A. Farmer, 1992. "Indeterminacy and Increasing Returns," UCLA Economics Working Papers 646, UCLA Department of Economics.
  10. Benhabib, Jess & Farmer, Roger E. A., 1996. "Indeterminacy and sector-specific externalities," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 421-443, June.
  11. Jaimovich, Nir, 2008. "Income effects and indeterminacy in a calibrated one-sector growth model," Journal of Economic Theory, Elsevier, vol. 143(1), pages 610-623, November.
  12. Benhabib, Jess & Nishimura, Kazuo, 1996. "Indeterminancy and Sunspots with Constant Returns," Working Papers 96-44, C.V. Starr Center for Applied Economics, New York University.
  13. Pintus, Patrick A., 2007. "Local determinacy with non-separable utility," Journal of Economic Dynamics and Control, Elsevier, vol. 31(2), pages 669-682, February.
  14. Azariadis, Costas, 1981. "Self-fulfilling prophecies," Journal of Economic Theory, Elsevier, vol. 25(3), pages 380-396, December.
  15. Garnier, Jean-Philippe & Nishimura, Kazuo & Venditti, Alain, 2013. "Local Indeterminacy In Continuous-Time Models: The Role Of Returns To Scale," Macroeconomic Dynamics, Cambridge University Press, vol. 17(02), pages 326-355, March.
  16. Thomas HINTERMAIER, 2001. "Lower Bounds on Externalities in Sunspot Models," Economics Working Papers ECO2001/04, European University Institute.
  17. Sharon Harrison & Jang-Ting Guo, 2008. "Indeterminacy with No-Income-Effect Preferences and Sector-Specifc Externalities," Working Papers 0801, Barnard College, Department of Economics.
  18. Lloyd-Braga, Teresa & Nourry, Carine & Venditti, Alain, 2006. "Indeterminacy with Small Externalities: The Role of Non-Separable Preferences," CEPR Discussion Papers 5541, C.E.P.R. Discussion Papers.
  19. Robert J. Barro, 2009. "Rare Disasters, Asset Prices, and Welfare Costs," American Economic Review, American Economic Association, vol. 99(1), pages 243-64, March.
  20. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April.
  21. Bennett, Rosalind L. & Farmer, Roger E. A., 2000. "Indeterminacy with Non-separable Utility," Journal of Economic Theory, Elsevier, vol. 93(1), pages 118-143, July.
  22. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," NBER Working Papers 8896, National Bureau of Economic Research, Inc.
  23. Nishimura, Kazuo & Venditti, Alain, 2004. "Indeterminacy And The Role Of Factor Substitutability," Macroeconomic Dynamics, Cambridge University Press, vol. 8(04), pages 436-465, September.
  24. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  25. Patrick Pintus, 2006. "Indeterminacy with almost constant returns to scale: capital-labor substitution matters," Economic Theory, Springer, vol. 28(3), pages 633-649, 08.
  26. Basu, Susanto & Fernald, John G, 1997. "Returns to Scale in U.S. Production: Estimates and Implications," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 249-83, April.
  27. Campbell, John Y., 1999. "Asset prices, consumption, and the business cycle," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 19, pages 1231-1303 Elsevier.
  28. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 825-853, August.
  29. Kazuo Nishimura & Koji Shimomura, 2006. "Indeterminacy in a dynamic two-country model," Economic Theory, Springer, vol. 29(2), pages 307-324, October.
  30. Casey B. Mulligan, 2002. "Capital, Interest, and Aggregate Intertemporal Substitution," NBER Working Papers 9373, National Bureau of Economic Research, Inc.
  31. Nishimura, Kazuo & Venditti, Alain, 2007. "Indeterminacy in discrete-time infinite-horizon models with non-linear utility and endogenous labor," Journal of Mathematical Economics, Elsevier, vol. 43(3-4), pages 446-476, April.
  32. Meng, Qinglai & Yip, Chong Kee, 2008. "On indeterminacy in one-sector models of the business cycle with factor-generated externalities," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 97-110, March.
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