ENDOGENOUS BUSINESS CYCLES IN OVERLAPPING-GENERATIONS ECONOMIES WITH MULTIPLE CONSUMPTION GOODS

Carine Nourry and Alain Venditti

Macroeconomic Dynamics, 2012, vol. 16, issue S1, 86-102

Abstract: We consider an overlapping-generations economy with two consumption goods. There are two sectors that produce a pure consumption good and a mixed good that can be either consumed or used as capital. We prove that the existence of Pareto-optimal expectations-driven fluctuations is compatible with standard sectoral technologies if the share of the pure consumption good is low enough. Following Reichlin's [Journal of Economic Theory 40 (1986), 89–102] influential conclusion, this result suggests that some fiscal policy rules can prevent business-cycle fluctuations in the economy by driving it to the optimal steady state as soon as they are announced.

Date: 2012
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