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Indeterminacy with Small Externalities: The Role of Non-Separable Preferences

Teresa Lloyd-Braga (), Carine Nourry and Alain Venditti ()

No 5541, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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

Keywords: capital and labour externalities; endogenous cycles; endogenous labour supply; indeterminacy; infinite-horizon model (search for similar items in EconPapers)
JEL-codes: C62 E32 O41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2006-03
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