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Wiley InterScience | ||||||||
  International Journal of Economic TheoryVolume 3 Issue 4, Pages 235 - 259 Published Online: 7 Dec 2007 © 2009 The International Association for Economic Theory
Abstract | References | Full Text: PDF (Size: 271K) | Related Articles | Citation Tracking  Intertemporal substitution in consumption, labor supply elasticity and sunspot fluctuations in continuous-time models We are grateful to R. Dos Santos Ferreira, J. M. Grandmont, T. Seegmuller and K. Shimomura for useful comments and suggestions. The current version also benefited from a presentation at the "2006 ASSET Meeting", Lisbon, November 2006. This paper was revised while Alain Venditti was visiting the Institute of Economic Research of Kyoto University. He thanks Professor Kazuo Nishimura and all the staff of the Institute for their kind invitation. Copyright 2007 IAET KEYWORDS sector-specific externalities • constant returns • intertemporal substitution in consumption • elastic labor • indeterminacy KEYWORDS C62 • E32 • O41 ABSTRACTThe aim of this paper is to discuss the roles of the elasticity of intertemporal substitution in consumption and the elasticity of the labor supply on the local determinacy properties of the steady state in a two-sector economy with constant elasticity of substitution technologies and sector-specific externalities. Our main results provide necessary and sufficient conditions for local indeterminacy. First, we show that the consumption good sector needs to be capital intensive at the private level and labor intensive at the social level. Second, we prove that under this capital intensity configuration, the existence of sunspot fluctuations is obtained if and only if the elasticity of intertemporal substitution in consumption is large enough but the elasticity of the labor supply is low enough. In particular, we will show on the one hand that when the labor supply is infinitely elastic, the steady state is always saddle-point stable, and on the other hand that when the elasticity of intertemporal substitution in consumption is infinite, labor does not have any influence on the local stability properties of the equilibrium path. Accepted 28 July 2007 | 
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