Indeterminacy with No-Income-Effect Preferences and Sector-Specific Externalities

Guo, Jang-Ting () and Sharon G. Harrison ()
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Guo, Jang-Ting: Department of Economics, University of California Riverside

No 200809, Working Papers from University of California at Riverside, Department of Economics

Abstract: We examine a two-sector real business cycle model with sector-specific externalities in the production of distinct consumption and investment goods. In addition, the household utility is postulated to exhibit no income effect on the demand for leisure. Unlike in the one-sector counterpart, we show that equilibrium indeterminacy can result with sufficiently high returns-to-scale in the production of investment goods. We also find that the smaller the labor supply elasticity, the lower the threshold level of returns-to-scale needed for generating indeterminacy and sunspots. This finding turns out to be exactly the opposite of that in all existing RBC-based indeterminacy studies.

Keywords: Indeterminacy; Income Effect; Sector-Specific Externalities (search for similar items in EconPapers)
JEL-codes: E30 E32 (search for similar items in EconPapers)
Date: 2008-07, Revised 2008-07
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http://economics.ucr.edu/papers/papers08/08-09.pdf First version, 2008 (application/pdf)

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Working Paper: Indeterminacy with No-Income-Effect Preferences and Sector-Specifc Externalities (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:ucr:wpaper:200809

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