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Indeterminacy with small externalities: The role of non‐separable preferences
Author(s) -
LloydBraga Teresa,
Nourry Carine,
Venditti Alain
Publication year - 2006
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/j.1742-7363.2006.0034.x
Subject(s) - economics , elasticity of substitution , externality , homothetic transformation , microeconomics , elasticity (physics) , elasticity of intertemporal substitution , indeterminacy (philosophy) , separable space , consumption (sociology) , capital (architecture) , production (economics) , econometrics , growth model , mathematical analysis , social science , materials science , geometry , mathematics , physics , archaeology , quantum mechanics , sociology , composite material , history
In this paper we consider a Ramsey one‐sector model with non‐separable homothetic preferences, endogenous labor and productive external effects arising from average levels of capital and labor. We show that indeterminacy cannot arise when there are only capital externalities but that it does occur when there are only labor external effects. We prove that sunspot fluctuations are fully consistent with small market imperfections and realistic calibrations for the elasticity of capital–labor substitution (including the Cobb‐Douglas specification) provided the elasticity of intertemporal substitution in consumption and the elasticity of labor supply are large enough.