TY - JOUR
T1 - On the stability of the two-sector neoclassical growth model with externalities
AU - Herrendorf, Berthold
AU - Valentinyi, Ákos
N1 - Funding Information:
We are particularly indebted to Manuel Santos for his help. Moreover, we have profited from the comments of the editor Peter Ireland, an anonymous referee, Jess Benhabib, Michele Boldrin, Robin Mason, Salvador Ortigueira, Juuso Välimäki, Mark Weder, the audiences at Carlos III, Frankfurt, the Helsinki School of Economics, and Southampton. Herrendorf acknowledges research funding from the Spanish Dirección General de Investigación (Grant BEC2000-0170), from the European Union (Project 721 ‘New Approaches in the Study of Economic Fluctuations’), and from the Instituto Flores de Lemus (Universidad Carlos III de Madrid).
PY - 2006/8
Y1 - 2006/8
N2 - We study a class of two-sector growth models with sector-specific externalities, in which one sector produces consumption and the other sector produces investment. The novelty is that investment allocated to the consumption sector is an imperfect substitute for investment allocated to the investment sector. We show analytically that in this case local indeterminacy near the steady state is impossible for every empirically plausible specification of the model parameters. More specifically, we show that a necessary condition for local indeterminacy is an upward-sloping aggregate labor demand curve in the investment sector, which requires a counterfactual strength of the externality. We show numerically that an elasticity of substitution of plausible size implies determinacy near the steady state. These findings differ sharply from the standard result for two-sector models that if the investments allocated to the two sectors are perfect substitutes, then local indeterminacy occurs for a wide range of plausible parameter values.
AB - We study a class of two-sector growth models with sector-specific externalities, in which one sector produces consumption and the other sector produces investment. The novelty is that investment allocated to the consumption sector is an imperfect substitute for investment allocated to the investment sector. We show analytically that in this case local indeterminacy near the steady state is impossible for every empirically plausible specification of the model parameters. More specifically, we show that a necessary condition for local indeterminacy is an upward-sloping aggregate labor demand curve in the investment sector, which requires a counterfactual strength of the externality. We show numerically that an elasticity of substitution of plausible size implies determinacy near the steady state. These findings differ sharply from the standard result for two-sector models that if the investments allocated to the two sectors are perfect substitutes, then local indeterminacy occurs for a wide range of plausible parameter values.
KW - Determinacy
KW - Imperfect substitutability
KW - Local indeterminacy
KW - Sector-specific externality
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U2 - 10.1016/j.jedc.2005.05.006
DO - 10.1016/j.jedc.2005.05.006
M3 - Article
AN - SCOPUS:33745747093
SN - 0165-1889
VL - 30
SP - 1339
EP - 1361
JO - Journal of Economic Dynamics and Control
JF - Journal of Economic Dynamics and Control
IS - 8
ER -