Working Paper: CEPR ID: DP5541
Authors: Teresa Lloyd-Braga; Carine Nourry; Alain Venditti
Abstract: In this paper we consider a Ramsey one-sector model with non-separable homothetic preferences, endogenous labour and productive external effects arising from average capital and labour. We show that indeterminacy cannot arise when there are only capital externalities but that it does when there are only labour external effects. We prove that sunspot fluctuations are fully consistent with small market imperfections and realistic calibrations for the elasticity of capital-labour substitution (including the Cobb-Douglas specification) provided the elasticity of intertemporal substitution in consumption and the elasticity of the labour supply are large enough.
Keywords: capital and labour externalities; endogenous cycles; endogenous labour supply; indeterminacy; infinite-horizon model
JEL Codes: C62; E32; O41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| absence of labor externalities (J89) | determinacy (D81) |
| labor externalities (J49) | local indeterminacy (D89) |
| elasticity of intertemporal substitution in consumption and labor supply (D15) | local indeterminacy (D89) |
| small labor external effects (J49) | local indeterminacy (D89) |
| small market imperfections (D43) | sunspot fluctuations (E32) |
| Cobb-Douglas technology + conditions (D24) | local indeterminacy (D89) |