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Equilibrium Indeterminacy in an Endogenous Growth Model: Debt as a Coordination Device

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  • Salvador Ortigueira

    (Department of Economics, Cornell University)

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    Abstract

    This paper presents a two-sector endogenous growth model where public spending -which is endogenous and productive- may generate equilibrium indeterminacy. Under certain mild conditions, there exists a continuum of expectations-driven equilibrium paths approaching a common balanced growth path. We show that the welfare-maximizing equilibrium path is associated with a labor supply as large as possible at time zero. Furthermore, the welfare cost of indeterminacy can represent more than a 2.1% of total consumption. It is also shown that public debt may be used to coordinate private expectations on current and future prices, and therefore, may break down the indeterminacy result. The equilibrium selection mechanism works through the amount of debt issued at time zero.

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    File URL: http://ftp.itam.mx/pub/academico/inves/ortigueira/9901.pdf
    File Function: First version, 1999
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    Bibliographic Info

    Paper provided by Centro de Investigacion Economica, ITAM in its series Working Papers with number 9901.

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    Length: 30 pages
    Date of creation: Sep 1999
    Date of revision:
    Handle: RePEc:cie:wpaper:9901

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    1. Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
    2. Benhabib Jess & Farmer Roger E. A., 1994. "Indeterminacy and Increasing Returns," Journal of Economic Theory, Elsevier, vol. 63(1), pages 19-41, June.
    3. Karl Shell, 2010. "Toward A Theory of Inventive Activity and Capital Accumulation," Levine's Working Paper Archive 1407, David K. Levine.
    4. Barro, Robert J. & Sala-i-Martin, Xavier, 1992. "Public Finance in Models of Economic Growth," CEPR Discussion Papers 630, C.E.P.R. Discussion Papers.
    5. Christophe Chamley, 1991. "Externalities and Dynamics in Models of "Learning or Doing"," Boston University - Institute for Economic Development 17, Boston University, Institute for Economic Development.
    6. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-34, June.
    7. David Aschauer, 1988. "Is public expenditure productive?," Staff Memoranda 88-7, Federal Reserve Bank of Chicago.
    8. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, vol. 4(3), pages 345-80.
    9. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
    10. Ratner, Jonathan B., 1983. "Government capital and the production function for U.S. private output," Economics Letters, Elsevier, vol. 13(2-3), pages 213-217.
    11. Jang-Ting Guo & Kevin J. Lansing, 1997. "Indeterminacy and stabilization policy," Working Paper 9708, Federal Reserve Bank of Cleveland.
    12. Glomm, Gerhard & Ravikumar, B., 1994. "Public investment in infrastructure in a simple growth model," Journal of Economic Dynamics and Control, Elsevier, vol. 18(6), pages 1173-1187, November.
    13. Morrison, Catherine J & Schwartz, Amy Ellen, 1996. "State Infrastructure and Productive Performance," American Economic Review, American Economic Association, vol. 86(5), pages 1095-1111, December.
    14. Evans, Paul & Karras, Georgios, 1994. "Are Government Activities Productive? Evidence from a Panel of U.S. States," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 1-11, February.
    15. Karl Shell, 2010. "A Model of Inventive Activity and Capital Accumulation," Levine's Working Paper Archive 1409, David K. Levine.
    16. Michele Boldrin & Aldo Rustichini, 2010. "Growth and Indeterminacy in Dynamic Models with Externalities," Levine's Working Paper Archive 1382, David K. Levine.
    17. Xie Danyang, 1994. "Divergence in Economic Performance: Transitional Dynamics with Multiple Equilibria," Journal of Economic Theory, Elsevier, vol. 63(1), pages 97-112, June.
    18. Alicia H. Munnell, 1990. "Why has productivity growth declined? Productivity and public investment," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 3-22.
    19. Benhabib Jess & Perli Roberto, 1994. "Uniqueness and Indeterminacy: On the Dynamics of Endogenous Growth," Journal of Economic Theory, Elsevier, vol. 63(1), pages 113-142, June.
    20. Lynde, Catherine & Richmond, J, 1993. "Public Capital and Total Factor Productivity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(2), pages 401-14, May.
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    Cited by:
    1. Ortigueira, Salvador & Santos, Manuel S., 2001. "Equilibrium Dynamics in a Two-Sector Model with Taxes," Working Papers 01-17, Cornell University, Center for Analytic Economics.
    2. Manuel Santos, . "On Non-Existence of Markov Equilibria in Competitive-Market Economies," Working Papers 2133305, Department of Economics, W. P. Carey School of Business, Arizona State University.

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