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Indeterminacy with Small Externalities: The Role of Non-Separable Preferences

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  • Lloyd-Braga, Teresa
  • Nourry, Carine
  • Venditti, Alain

Abstract

In this paper we consider a Ramsey one-sector model with non-separable homothetic preferences, endogenous labour and productive external effects arising from average capital and labour. We show that indeterminacy cannot arise when there are only capital externalities but that it does when there are only labour external effects. We prove that sunspot fluctuations are fully consistent with small market imperfections and realistic calibrations for the elasticity of capital-labour substitution (including the Cobb-Douglas specification) provided the elasticity of intertemporal substitution in consumption and the elasticity of the labour supply are large enough.

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  • 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.
    • Handle: RePEc:cpr:ceprdp:5541
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    10. Patrick Pintus, 2006. "Indeterminacy with almost constant returns to scale: capital-labor substitution matters," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 28(3), pages 633-649, August.
    11. Hintermaier, Thomas, 2003. "On the minimum degree of returns to scale in sunspot models of the business cycle," Journal of Economic Theory, Elsevier, vol. 110(2), pages 400-409, June.
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    Cited by:

    1. Frédéric Dufourt & Kazuo Nishimura & Alain Venditti, 2022. "Expectations, self-fulfilling prophecies and the business cycle," Working Papers hal-03923946, HAL.
    2. Jang-Ting Guo & Kevin J. Lansing, 2008. "Capital-Labor Substitution, Equilibrium Indeterminacy, and the Cyclical Behavior of Labor Income," Working Papers 200804, University of California at Riverside, Department of Economics, revised Apr 2008.
    3. Stefano Bosi & Francesco Magris & Alain Venditti, 2007. "Sunspot Fluctuations in Two-sector Economies with Heterogeneous Agents," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 33(2), pages 311-331, November.
    4. Busato, Francesco & Chiarini, Bruno & Marchetti, Enrico, 2011. "Indeterminacy, underground activities and tax evasion," Economic Modelling, Elsevier, vol. 28(3), pages 831-844, May.
    5. Frédéric Dufourt & Kazuo Nishimura & Alain Venditti, 2016. "Sunspot fluctuations in two-sector models: New results with additively separable preferences," International Journal of Economic Theory, The International Society for Economic Theory, vol. 12(1), pages 67-83, March.
    6. Alonso-Carrera, Jaime & Caballé, Jordi & Raurich, Xavier, 2008. "Can consumption spillovers be a source of equilibrium indeterminacy?," Journal of Economic Dynamics and Control, Elsevier, vol. 32(9), pages 2883-2902, September.
    7. Francesco Busato & Enrico Marchetti, 2009. "Skills, sunspots and cycles," Journal of Economics, Springer, vol. 97(3), pages 189-215, July.
    8. Nourry, Carine & Seegmuller, Thomas & Venditti, Alain, 2013. "Aggregate instability under balanced-budget consumption taxes: A re-examination," Journal of Economic Theory, Elsevier, vol. 148(5), pages 1977-2006.
    9. Been-Lon Chen & Angus Chu, 2010. "On R&D spillovers, multiple equilibria and indeterminacy," Journal of Economics, Springer, vol. 100(3), pages 247-263, July.
    10. Busato, Francesco & Marchetti, Enrico, 2010. "Endogenous skill cycles," Research in Economics, Elsevier, vol. 64(3), pages 175-185, September.
    11. Wong, Tsz-Nga & Yip, Chong K., 2010. "Indeterminacy and the elasticity of substitution in one-sector models," Journal of Economic Dynamics and Control, Elsevier, vol. 34(4), pages 623-635, April.
    12. 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.
    13. Jean-Philippe Garnier, 2013. "Keeping-up with the Joneses, a new source of fluctuations in the two-sector continuous-time models," Working Papers hal-00991664, HAL.
    14. Jean‐Philippe Garnier & Kazuo Nishimura & Alain Venditti, 2007. "Intertemporal substitution in consumption, labor supply elasticity and sunspot fluctuations in continuous‐time models," International Journal of Economic Theory, The International Society for Economic Theory, vol. 3(4), pages 235-259, December.
    15. Magris, Francesco, 2012. "Indeterminacy and multiple steady states with sector-specific externalities," Economic Modelling, Elsevier, vol. 29(6), pages 2664-2672.
    16. Been‐Lon Chen & Shun‐Fa Lee & Xavier Raurich, 2020. "Non‐separable utilities and aggregate instability," International Journal of Economic Theory, The International Society for Economic Theory, vol. 16(2), pages 222-237, June.
    17. Nishimura, Kazuo & Venditti, Alain, 2010. "Indeterminacy and expectation-driven fluctuations with non-separable preferences," Mathematical Social Sciences, Elsevier, vol. 60(1), pages 46-56, July.

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    More about this item

    Keywords

    Indeterminacy; Endogenous cycles; Infinite-horizon model; Endogenous labour supply; Capital and labour externalities;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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