Title: Consumption externalities and indeterminacy in a continuous-time two-sector growth model

Authors: Takuma Kunieda; Kazuo Nishimura

Addresses: School of Economics, Kwansei Gakuin University, 1-155 Uegahara Ichiban-Cho, Nishinomiya, Hyogo 662-8501, Japan ' RIEB, Kobe University, 2-1 Rokkodaicho, Nadaku, Kobe 657-8501, Japan; Santa Fe Institute, 1399, Hyde Park Road, Santa Fe, NM 87501, USA

Abstract: A two-sector dynamic general equilibrium model is investigated in which general goods (which are used for both consumption and investment) and consumption goods are produced. Although agents extract their felicity from consuming both goods, the average consumption of general goods has externalities on both preferences for general and consumption goods. Assuming that both production functions exhibit constant returns to scale and labour supply is inelastic, we demonstrate that if the consumption externality of general goods on the preference for consumption goods is negative and sufficiently smaller than that on the preference for general goods, the steady state is totally stable and local indeterminacy of equilibrium occurs.

Keywords: consumption externalities; indeterminacy; continuous-time growth models; two-sector growth models; equilibrium modelling; general goods; consumption goods.

DOI: 10.1504/IJDSDE.2016.081821

International Journal of Dynamical Systems and Differential Equations, 2016 Vol.6 No.4, pp.358 - 369

Received: 09 May 2016
Accepted: 22 Aug 2016

Published online: 25 Jan 2017 *

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