Consumption externalities and indeterminacy in a continuous-time two-sector growth model (Q2289493)

Summary: A two-sector dynamic general equilibrium model is investigated in which general goods (which are used for both consumption and investment) and consumption goods are produced. Although agents extract their felicity from consuming both goods, the average consumption of general goods has externalities on both preferences for general and consumption goods. Assuming that both production functions exhibit constant returns to scale and labour supply is inelastic, we demonstrate that if the consumption externality of general goods on the preference for consumption goods is negative and sufficiently smaller than that on the preference for general goods, the steady state is totally stable and local indeterminacy of equilibrium occurs.