INDETERMINACY IN AGGREGATE MODELS WITH SMALL EXTERNALITIES: AN INTERPLAY BETWEEN PREFERENCES AND TECHNOLOGY

In this paper we consider a Ramsey-type aggregate model with general preferences and technology, endogenous labor and factor-specific productive external effects arising from average capital and labor. First, we show that indeterminacy cannot arise when there are only capital externalities but that it does when there are only labor external effects. Second, we prove that only the additively-separable and linear homogeneous specifications for the utility function allow to get local indeterminacy under small externalities and plausible restrictions on the main parameters. Third, we show that the existence of sunspot fluctuations is intimately related to the occurrence of periodic cycles through a Hopf bifurcation.