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Non‐separable utilities and aggregate instability
Author(s) -
Chen BeenLon,
Lee ShunFa,
Raurich Xavier
Publication year - 2020
Publication title -
international journal of economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 11
eISSN - 1742-7363
pISSN - 1742-7355
DOI - 10.1111/ijet.12188
Subject(s) - economics , externality , instability , separable space , consumption (sociology) , aggregate demand , microeconomics , aggregate income , aggregate supply , aggregate (composite) , monetary economics , econometrics , labour economics , income distribution , mathematics , monetary policy , inequality , physics , mathematical analysis , social science , materials science , sociology , composite material , mechanics
This paper studies an infinite‐horizon two‐sector growth model with sector‐specific externalities and preferences that are non‐separable between consumption and leisure. We find two main results. First, a larger income effect on the labor supply increases the possibility of macroeconomic instability. Second, a larger elasticity of the labor supply may increase or decrease the possibility of aggregate instability, depending on the intensity of the income effect.