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Endogenous Fluctuations in Two-Sector Models: Role of Preferences

Author

Listed:
  • Alain Venditti
  • Kazuo Nishimura

    (Kyoto University)

  • Harutaka Takahashi

    (Department of Economics, Meiji Gakuin University - Meiji Gakuin University)

Abstract

We consider a discrete-time two-sector CES (constant elasticity of substitution) economy with sector specific external effects and nonlin- ear preferences. Our goal is to examine carefully the influence of the utility curvature on the occurrence of multiple equilibria. We show that local in- determinacy depends on an interplay between factor substitutability and the elasticity of intertemporal substitution in consumption. Moreover, consider- ing that, when the external effects are set equal to zero, we get a two-sector optimal growth model, we study also the role of the utility curvature on the occurrence of competitive equilibrium cycles. We show that persistent en- dogenous fluctuations and macroeconomic volatility require a strong enough elasticity of intertemporal substitution in consumption.

Suggested Citation

  • Alain Venditti & Kazuo Nishimura & Harutaka Takahashi, 2006. "Endogenous Fluctuations in Two-Sector Models: Role of Preferences," Post-Print halshs-00280007, HAL.
    • Handle: RePEc:hal:journl:halshs-00280007
    DOI: 10.1007/s10957-006-9025-8
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    References listed on IDEAS

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    1. Benhabib Jess & Farmer Roger E. A., 1994. "Indeterminacy and Increasing Returns," Journal of Economic Theory, Elsevier, vol. 63(1), pages 19-41, June.
    2. Boldrin, Michele & Rustichini, Aldo, 1994. "Growth and Indeterminacy in Dynamic Models with Externalities," Econometrica, Econometric Society, vol. 62(2), pages 323-342, March.
    3. David Gale, 1967. "On Optimal Development in a Multi-Sector Economy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 34(1), pages 1-18.
    4. Mitra, Tapan & Nishimura, Kazuo, 2001. "Discounting and Long-Run Behavior: Global Bifurcation Analysis of a Family of Dynamical Systems," Journal of Economic Theory, Elsevier, vol. 96(1-2), pages 256-293, January.
    5. Jess Benhabib & Kazuo Nishimura, 2012. "Indeterminacy and Sunspots with Constant Returns," Springer Books, in: John Stachurski & Alain Venditti & Makoto Yano (ed.), Nonlinear Dynamics in Equilibrium Models, edition 127, chapter 0, pages 311-346, Springer.
    6. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April.
    7. Kazuo Nishimura & Jess Benhabib & Alain Venditti, 2002. "Indeterminacy and cycles in two-sector discrete-time model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 20(2), pages 217-235.
    8. Boldrin, Michele & Montrucchio, Luigi, 1986. "On the indeterminacy of capital accumulation paths," Journal of Economic Theory, Elsevier, vol. 40(1), pages 26-39, October.
    9. Kim, Jinill, 2005. "Does utility curvature matter for indeterminacy?," Journal of Economic Behavior & Organization, Elsevier, vol. 57(4), pages 421-429, August.
    10. 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.
    11. Jess Benhabib & Kazuo Nishimura, 2012. "Competitive Equilibrium Cycles," Springer Books, in: John Stachurski & Alain Venditti & Makoto Yano (ed.), Nonlinear Dynamics in Equilibrium Models, edition 127, chapter 0, pages 75-96, Springer.
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    Cited by:

    1. Ghiglino, Christian & Venditti, Alain, 2007. "Wealth inequality, preference heterogeneity and macroeconomic volatility in two-sector economies," Journal of Economic Theory, Elsevier, vol. 135(1), pages 414-441, July.
    2. 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.
    3. Kazuo Nishimura & Alain Venditti, 2012. "Indeterminacy in Discrete-Time Infinite-Horizon Models with Non-linear Utility and Endogenous Labor," Springer Books, in: John Stachurski & Alain Venditti & Makoto Yano (ed.), Nonlinear Dynamics in Equilibrium Models, edition 127, chapter 0, pages 363-400, Springer.
    4. Venditti, Alain, 2005. "The two sector overlapping generations model: A simple formulation," Research in Economics, Elsevier, vol. 59(2), pages 164-188, June.
    5. Christian Ghiglino & Alain Venditti, 2008. "The role of the wealth distribution on output volatility," Working Papers halshs-00281379, HAL.

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