Local indeterminacy under dynamic efficiency two-sector overlapping generations economy

Carine Nourry and Alain Venditti

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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 [9] influential conclusion is a robust property 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: 2009-11-15
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00432270v1
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Related works:
Journal Article: Local indeterminacy under dynamic efficiency in a two-sector overlapping generations economy (2011)
Working Paper: Local indeterminacy under dynamic efficiency in a two-sector overlapping generations economy (2009)
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