Leisure Externalities and Endogenous Cycles in an OLG Model

This chapter examines the e¤ect of leisure externalities on the ap- pearance of local indeterminacy in a two-period overlapping generations economy with capital accumulation. Households work and consume in both periods of their life. Labor supply is elastic for young while inelastic for adult. It is shown that higher external e¤ects in leisure promotes the occurrence of local indeterminacy, in the sense that the range for the para- meter value giving rise to it becomes larger. However, high level of inelas- tic second-period supply makes the emergence of fluctuations based upon self-fulilling expectations less likely. In other terms, the second-period inelastic labor supply acts as a stabilizing force while leisure externalities act as a destabilizing force. The analytical findings are complemented by economic interpretations.