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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 (MRS) between an agent's own consumption and the others’ consumption is constant along the equilibrium path, the equilibrium does not exhibit indeterminacy. In contrast, when that MRS is not constant, the...
Are consumption externalities sources of indeterminacy? The answer is negative in conventional wisdom. This paper shows consumption externalities establish local indeterminacy if the degree of decreasing impatience is sufficiently large. Dynamic models with indeterminacy are valuable as they tend to explain economic fluctuations without relying on exogenous shocks and question interpretation of simple...
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