Local indeterminacy in two-sector overlapping generations models

In this paper, we consider a two-sector two-periods overlapping generations model with inelastic labor, consumption in both periods of life and homothetic CES preferences. We assume in a first step that the consumption levels are gross substitutes and the consumption good is capital intensive. We prove that when dynamic efficiency holds, the occurrence of sunspot fluctuations requires low enough values for the sectoral elasticities of capital-labor substitution. On the contrary, under dynamic inefficiency, local indeterminacy may be obtained without any restriction on the input substitutability properties. Assuming in a second step that gross substitutability in consumption does not hold, we show that sunspot fluctuations arise under dynamic efficiency without any restriction on the sign of the capital intensity difference across sectors and provided the sectoral elasticities of capital-labor substitution admit intermediary values.Two-sector OLG model, social production function, dynamic (in)efficiency, gross substitutability in consumption, local indeterminacy, sunspot fluctuations

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

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.Two-sector OLG model, dynamic efficiency, gross substitutability in consumption, local indeterminacy, stabilization policy

Aggregate instability under balanced-budget consumption taxes: a re-examination

We re-examine the destabilizing role of balanced-budget fiscal policy rules based on consumption taxation. Using a one-sector model with infinitely-lived households, and assuming that preferences are of the Greenwood-Hercovitz-Huffman [8] (GHH) type, we show that non-linear consumption taxation may destabilize the economy, promoting expectation-driven fluctuations, if the tax rate is counter-cyclical. We also exhibit a Laffer curve, which explains the multiplicity of steady states when the tax rate is counter-cyclical. All these results are mainly driven by the absence of income effect. Finally, a numerical illustration shows that consumption taxation may be a source of instability for most OECD countries.Indeterminacy; endogenous business cycles; consumption taxes; balanced-budget rule; infinite-horizon model

Polluting Industrialization

Recently, many contributions have focused on the relationship between capital accumulation, growth and population dynamics, introducing fertility choice in macro-dynamic models. In this paper, we go one step further highlighting also the link with pollution. We develop a simple overlapping generations model with paternalistic altruism according to wealth and environmental concerns. One can therefore explain a simultaneous increase of capital intensity, population growth and pollution, namely a polluting industrialization. We show in addition that a permanent productivity shock, possibly associated to technological innovations, promotes such a polluting development process, escaping a trap where the economy is relegated to a low capital intensity, population growth and pollution.Growth; Population dynamics; Pollution; Altruism; Development

Integration, real exchange rate and growth

This paper deals with the relationship between real exchange rate and growth in the process of economic integration. Using a 2x2x2 model of overlapping generations, we show that growth depends on the real exchange rate (RER) through human capital accu- mulation. Integration leads to convergence in growth rates only in presence of cross-border externalities in human capital. Otherwise, divergence is likely to occur and integration may be good (bad) for growth if the integrated RER is higher (lower) than the autarky's RER. In reality, since capital mobility prevents the real exchange rate from adjusting, economic inte- gration may lead to income divergence if countries are too different in terms of preference, altruism or productivity

On efficiency and local uniqueness in two-sector OLG economies

We consider a two-sector overlapping generations model with homothetic preferences. Under standard conditions on technologies, upon large enough values for the share of first period consumption over the wage income, we prove that dynamic efficiency and local uniqueness of the competitive equilibrium hold. On the contrary, for lower values of the share of first period consumption over the wage income which imply dynamic inefficiency of the steady state, local indeterminacy arises without requiring strong restrictions on the sectoral elasticities of capital-labor substitution.Two-sector OLG model, efficiency, local uniqueness

Debt, deficits and finite horizons: the stochastic case

We introduce aggregate uncertainty and complete markets into Blanchard's (1985) perpetual youth model. We show how to construct a simple formula for the pricing kernel in terms of observable aggregate variables. We study a pure trade version of our model and we show it behaves much like the two-period overlapping generations model. Our methods are easily generalized to economies with production and they should prove useful to researchers who seek a tractable stochastic model in which fiscal policy has real effects on aggregate allocations.Overlapping generations ; indeterminacy ; sunspot equilibria ; aggregate uncertainty

Local indeterminacy in two-sector overlapping generations models

In this paper, we consider a two-sector two-periods overlapping generations model with inelastic labor, consumption in both periods of life and homothetic CES preferences. We assume in a first step that the consumption levels are gross substitutes and the consumption good is capital intensive. We prove that when dynamic efficiency holds, the occurrence of sunspot fluctuations requires low enough values for the sectoral elasticities of capital-labor substitution. On the contrary, under dynamic inefficiency, local indeterminacy may be obtained without any restriction on the input substitutability properties. Assuming in a second step that gross substitutability in consumption does not hold, we show that sunspot fluctuations arise under dynamic efficiency without any restriction on the sign of the capital intensity difference across sectors and provided the sectoral elasticities of capital-labor substitution admit intermediary values

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

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

Should a Country Invest more in Human or Physical Capital? A Two-Sector Endogenous Growth Approach

Should a country invest more in human or physical capital? The present paper addresses this issue, considering the impact of different factor intensities between sectors on both optimal human and physical capital accumulation. Using a two-sector overlapping generations setting with endogenous growth driven by human capital accumulation, we prove that relative factor intensity between sectors drastically shapes the welfare analysis: two laissez-faire economies with the same global capital share may generate physical capital excess or scarcity, with respect to the optimum. The model for the Japanese economy, that experienced a factor intensity reversal after the oil shock, is then calibrated. It is shown that Japan invested relatively too much in human capital before 1975, but has not invested enough since 1990