Sunspot Fluctuations in Two-Sector Models with Variable Income Effects

Frédéric Dufourt, Kazuo Nishimura, Carine Nourry and Alain Venditti

Chapter Chapter 4 in Sunspots and Non-Linear Dynamics, 2017, pp 71-96 from Springer

Abstract: Abstract We analyze a version of the Benhabib and Farmer (1996) two-sector model with sector-specific externalities in which we consider a class of utility functions inspired from the one considered in Jaimovich and Rebelo (2009) which is flexible enough to encompass varying degrees of income effect. First, we show that local indeterminacy and sunspot fluctuations occur in 2-sector models under plausible configurations regarding all structural parameters—in particular regarding the intensity of income effects. Second, we prove that there even exist some configurations for which local indeterminacy arises under any degree of income effect. More precisely, for any given size of income effect, we show that there is a non-empty range of values for the Frisch elasticity of labor and the elasticity of intertemporal substitution in consumption such that indeterminacy occurs. This contrasts with the results obtained in one-sector models in both Nishimura et al. (2009), in which it is shown that indeterminacy cannot occur under either GHH and KPR preferences, and in Jaimovich (2008) in which local indeterminacy only arises for intermediary income effects.

Keywords: Indeterminacy; Sunspots; Income and substitution effects; Sector-specific externalities; Infinite-horizon two-sector model; C62; E32; O41 (search for similar items in EconPapers)
Date: 2017
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Working Paper: Sunspot Fluctuations in Two-Sector Models with Variable Income Effects (2017)
Working Paper: Sunspot Fluctuations in Two-Sector Models with Variable Income Effects (2015)
Working Paper: Sunspot Fluctuations in Two-Sector Models with Variable Income Effects (2015)
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DOI: 10.1007/978-3-319-44076-7_4

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