Endogenous Fluctuations in Two-Sector Models: Role of Preferences

Alain Venditti, Kazuo Nishimura and Harutaka Takahashi

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

Keywords: Sector specific externalities; elasticity of intertemporal substi- tution in consumption; elasticity of capital-labor substitution; local indeter- minacy; periodic cycles.; periodic cycles (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (5)

Published in Journal of Optimization Theory and Applications, 2006, 128 (2), pp.309-331. ⟨10.1007/s10957-006-9025-8⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00280007

DOI: 10.1007/s10957-006-9025-8

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