Local indeterminacy under dynamic efficiency in a two-sector overlapping generations economy

Carine Nourry (1) , Alain Venditti (1)

1 GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille

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 eciency 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 scale 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.

Mots clés: Two-sector OLG model; dynamic efficiency; gross substitutability in consumption; local indeterminacy; stabilization policy

Domaines: Economies et finances

Carine Nourry, Alain Venditti. Local indeterminacy under dynamic efficiency in a two-sector overlapping generations economy. 2009. ⟨halshs-00439240⟩