Characterization of Equilibrium Paths in a Two-Sector Economy with CES Production Functions and Sector-Specific Externality

Abstract

In this paper, we study a two-sector CES economy with sector-specific externality as described by Nishimura and Venditti (2004). We characterize the equilibrium paths in the case that allows negative externality as that equlibrium paths were not explicitly discussed by Nishimura and Venditti. We show how the degree of externality affects the local behavior of the equilibrium path around the steady state.Two-sector economy, sector-specific externalities, indeterminacy, capital-labor substitution