Global externalities, endogenous growth and sunspot fluctuations

Abstract

We consider a two-sector economy with Cobb-Douglas technologies, labor-augmenting global external effects and increasing social returns. We prove the existence of a normalized balanced growth path and we give conditions for the occurrence of sunspot fluctuations that are compatible with both types of capital intensity configuration at the private level provided the elasticity of intertemporal substitution in consumption admits intermediary values. We finally show that the existence of period-two cycles requires the consumption good to be physical capital intensive at the private level.