Equilibrium Cycles in a Two-Sector Economy with Sector Specific Externality

Abstract

In this paper, we study the two-sector CES economy with sector-specific externality (feedback effects) following Nishimura and Venditti \(2004). We characterize the equilibrium paths in the case that allows negative externality. That equilibrium paths were not explicitly discussed by Nishimura and Venditti and show how the degree of externality may generate equilibrium cycles around the steady state.Two-sector economy, sector-specific externalities, indeterminacy, period-two cycles, capital-labor substitution