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Indeterminacy with small externalities: The role of non‐separable preferences

Teresa Lloyd‐Braga, Carine Nourry and Alain Venditti ()
Authors registered in the RePEc Author Service: Teresa Lloyd-Braga ()

International Journal of Economic Theory, 2006, vol. 2, issue 3‐4, 217-239

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

Date: 2006
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