Home Production and Indeterminacy with Variable Income Effects

In this paper, we utilize a real business cycle model with home production, productive increasing returns and the Jaimovich-Rebelo’s preferences that allow for varying degrees of income effect, to show that when the values of income effect are intermediary and the level of increasing returns is reasonably high, the economy can be subject to local indeterminacy, provided that the other model parameters take reasonable values. In particular, we show that in the indeterminacy region, the minimum level of productive externality that induces instability increases as the income effect increases.