Endogenous Fluctuations in Two-Sector Models:
Role of Preferences

Alain Venditti , Kazuo Nishimura (1) , Harutaka Takahashi (2)

1 Kyoto University
2 Department of Economics, Meiji Gakuin University

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.

Mots clés: Sector specific externalities; elasticity of intertemporal substi- <br />tution in consumption; elasticity of capital-labor substitution; local indeter- <br />minacy; periodic cycles.; periodic cycles

Domaines: Economies et finances

Alain Venditti, Kazuo Nishimura, Harutaka Takahashi. Endogenous Fluctuations in Two-Sector Models:
Role of Preferences. Journal of Optimization Theory and Applications, 2006, 128 (2), pp.309-331. ⟨10.1007/s10957-006-9025-8⟩. ⟨halshs-00280007⟩