Local indeterminacy under dynamic efficiency in a two-sector overlapping generations economy

Carine Nourry and Alain Venditti

Journal of Mathematical Economics, 2011, vol. 47, issue 2, 164-169

Abstract: Abstract We consider a two-sector two-periods overlapping generations model with inelastic labor, consumption in both periods of life and homothetic CES preferences. Assuming gross substitutability and a capital intensive consumption good, we prove that when dynamic efficiency holds, local indeterminacy and sunspot fluctuations occur with low enough values for the sectoral elasticities of capital-labor substitution and we illustrate this finding within a standard example. This result shows that some fiscal policy rules can prevent the existence of business-cycle fluctuations in the economy by driving it to the optimal steady state as soon as it is announced, and thus shows that Reichlin's (1986) influential conclusion is compatible with positive elasticities of capital-labor substitution in a two-sector OLG economy.

Keywords: Two-sector; OLG; model; Dynamic; efficiency; Gross; substitutability; in; consumption; Local; indeterminacy; Stabilization; policy (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (12)

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Related works:
Working Paper: Local indeterminacy under dynamic efficiency two-sector overlapping generations economy (2009)
Working Paper: Local indeterminacy under dynamic efficiency in a two-sector overlapping generations economy (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:47:y:2011:i:2:p:164-169

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