Can consumption spillovers be a source of equilibrium indeterminacy?

• Authors: Jordi Caballé.
• BSE Working Paper: 112226 | September 15
• Keywords: Indeterminacy , consumption externalities , equilibrium efficiency
• JEL codes: D91, E62, O40
• Indeterminacy
• consumption externalities
• equilibrium efficiency

In this paper, we show that consumption externalities are a source of equilibrium indeterminacy in a growth model with endogenous labor supply. In particular, when the marginal rate of substitution between own consumption and the others’ consumption is constant along the equilibrium path, the equilibrium does not exhibit indeterminacy. In contrast, when that marginal rate of substitution is not constant, the equilibrium may exhibit indeterminacy even if the elasticity of the labor demand is smaller than the elasticity of the Frisch labor supply.