Indeterminacy with No-Income-Effect Preferences and Sector-Specifc Externalities
We examine a two-sector real business cycle model with sector-specifc ex-ternalities in the production of distinct consumption and investment goods. In addition, the household utility is postulated to exhibit no income effect on the demand for leisure. Unlike in the one-sector counterpart, we show that equilibrium indeterminacy can result with sufficiently high returns-to-scale in the production of investment goods. We also find that the lower the labor supply elasticity, the lower the threshold level of returns-to-scale needed for generating indeterminacy and sunspots. This Finding turns out to be exactly the opposite of that in all existing RBC-based indeterminacy studies.
Indeterminacy, Income Effect, Sector-Specific Externalities.
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