Indeterminacy in a model with production externality and inferiority in consumption

Abstract

AbstractWe study the dynamic property of a constant returns two‐sector model with sector‐specific externality. In this study, we consider two types of consumption good, one of which is a pure consumption good and the other is a consumable capital good. Then, we examine the case where households tend to consume more pure consumption goods and consume less consumable capital ones. We show that if a consumable capital good is inferior it is possible that indeterminacy occurs around a steady state without capital intensity reversal between the private and the social levels.