Endogenous Fluctuations in Two-Sector Models: Role of Preferences

Kazuo Nishimura, Harutaka Takahashi and Alain Venditti

Journal of Optimization Theory and Applications, 2006, vol. 128, issue 2, No 6, 309-331

Abstract: Abstract We consider a discrete-time two-sector CES (constant elasticity of substitution) economy with sector specific external effects and nonlinear preferences. Our goal is to examine carefully the influence of the utility curvature on the occurrence of multiple equilibria. We show that local indeterminacy depends on an interplay between factor substitutability and the elasticity of intertemporal substitution in consumption. Moreover, considering 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 endogenous fluctuations and macroeconomic volatility require a strong enough elasticity of intertemporal substitution in consumption.

Keywords: Sector specific externalities; elasticity of intertemporal substitution in consumption; elasticity of capital-labor substitution; local indeterminacy; periodic cycles (search for similar items in EconPapers)
Date: 2006
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DOI: 10.1007/s10957-006-9025-8

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