Endogenous time preference, consumption externalities, and trade: multiple steady states and indeterminacy

This study presents a two-sector dynamic general equilibrium model with capital accumulation and discusses the role of endogenous time preference and consumption externalities in closed and small open economies. While the economy has a unique and saddle-point stable steady state under autarky, under...

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Veröffentlicht in:Journal of economics (Vienna, Austria) Austria), 2019-03, Vol.126 (2), p.153-177
Hauptverfasser: Yanase, Akihiko, Karasawa-Ohtashiro, Yukio
Format: Artikel
Sprache:eng
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Zusammenfassung:This study presents a two-sector dynamic general equilibrium model with capital accumulation and discusses the role of endogenous time preference and consumption externalities in closed and small open economies. While the economy has a unique and saddle-point stable steady state under autarky, under free trade with decreasing marginal impatience (i.e., a household's discount rate is a decreasing function of its consumption), there might exist multiple steady states and indeterminacy of equilibrium paths. Specifically, if the degree of decreasing marginal impatience is sufficiently large and individuals' preferences exhibit admiration, the dynamic equilibria with diversified production might become indeterminate. We also analyze the economy's long-run trade pattern and its relationship with indeterminacy.
ISSN:0931-8658
1617-7134
DOI:10.1007/s00712-018-0614-4