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Non‐separable Utilities and Aggregate Instability

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Abstract

This paper studies an infinite‐horizon two‐sector growth model with sector‐specific externalities and preferences that are non‐separable between consumption and leisure. We find two main results. First, a larger income effect on the labor supply increases the possibility of macroeconomic instability. Second, a larger elasticity of the labor supply may increase or decrease the possibility of aggregate instability, depending on the intensity of the income effect.

Suggested Citation

  • Been-Lon Chen & Shun‐Fa Lee & Xavier Raurich, 2018. "Non‐separable Utilities and Aggregate Instability," IEAS Working Paper : academic research 18-A002, Institute of Economics, Academia Sinica, Taipei, Taiwan.
  • Handle: RePEc:sin:wpaper:18-a002
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    3. Benhabib Jess & Farmer Roger E. A., 1994. "Indeterminacy and Increasing Returns," Journal of Economic Theory, Elsevier, vol. 63(1), pages 19-41, June.
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    6. Abad, Nicolas & Seegmuller, Thomas & Venditti, Alain, 2017. "Nonseparable Preferences Do Not Rule Out Aggregate Instability Under Balanced-Budget Rules: A Note," Macroeconomic Dynamics, Cambridge University Press, vol. 21(01), pages 259-277, January.
    7. 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.
    8. Frédéric Dufourt & Kazuo Nishimura & Carine Nourry & Alain Venditti, 2015. "Sunspot Fluctuations in Two-Sector Models with Variable Income Effects," Working Papers halshs-01269951, HAL.
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    12. 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 402-417, June.
    13. 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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    More about this item

    Keywords

    : Indeterminacy; non‐separable preferences; income effect; labor supply elasticity;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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