Local indeterminacy in two-sector overlapping generations models

Abstract

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