We examine a two-sector real business cycle model with sector-specifc ex-ternalities in the production of distinct consumption and investment goods. In addition, the household utility is postulated to exhibit no income effect on the demand for leisure. Unlike in the one-sector counterpart, we...

It has been shown that an otherwise standard one-sector real business cycle model may exhibit indeterminacy and sunspots under a balanced-budget rule that consists of fixed and “wasteful” government spending and proportional income taxation. However, the economy always displays saddle-path...