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Complementarities, Costly Investment and Multiple Equilibria in a One-Sector Endogenous Growth Model

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    In this paper we develop a multiple equilibria one-sector R&D-based growth model, in which the key aspects are the assumption of complementarities between capital goods in the production function and the assumption of costly investment in capital. This second assumption is new to the R&D-based literature. The equilibrium solutions are obtained when the Preferences curve, which mirrors consumers’ savings decisions, and the Technology curve, which represents equilibria on the production side, cross. The combination of the two key assumptions produces a non-linear Technology curve, which consequently crosses the Preferences curve more than once, thus generating multiple equilibria. A numerical solutions exercise obtains two equilibria. Application of the stability under learning criterion allows for the identification of the two equilibria as stable. Expectations can lead the economy to either the equilibrium characterised by high-growth and high-interest rates, or to the equilibrium characterised by low-growth and low-interest rates. Hence, with this model, we wish to contribute to endogenous growth literature by providing a mechanism to explain how an economy can experience multiple equilibria situations.

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    File URL: http://www3.eeg.uminho.pt/economia/nipe/docs/2003/NIPE_WP_7_2003.PDF
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    Paper provided by NIPE - Universidade do Minho in its series NIPE Working Papers with number 7/2003.

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    Date of creation: 2003
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    Handle: RePEc:nip:nipewp:7/2003

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    Keywords: Growth; R&D; complementarities; costly investment; multiple equilibria.;

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    1. Silvestre, Joaquim, 1993. "The Market-Power Foundations of Macroeconomic Policy," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 105-41, March.
    2. van der Ploeg, Frederick, 1996. "Budgetary Policies, Foreign Indebtedness, the Stock Market, and Economic Growth," Oxford Economic Papers, Oxford University Press, vol. 48(3), pages 382-96, July.
    3. Evans, Geroge W & Honkapohja, Seppo & Romer, Paul, 1998. "Growth Cycles," American Economic Review, American Economic Association, vol. 88(3), pages 495-515, June.
    4. Luis A. Rivera-Batiz & Paul M. Romer, 1990. "Economic Integration and Endogenous Growth," NBER Working Papers 3528, National Bureau of Economic Research, Inc.
    5. Azariadis, Costas & Drazen, Allan, 1990. "Threshold Externalities in Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 501-26, May.
    6. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
    7. Cohen, Daniel, 1993. "Growth and External Debt," CEPR Discussion Papers 778, C.E.P.R. Discussion Papers.
    8. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-24, January.
    9. Benhabib, Jess & Perli, Roberto & Xie, Danyang, 1994. "Monopolistic competition, indeterminacy and growth," MPRA Paper 37411, University Library of Munich, Germany, revised 1994.
    10. Kiminiori Matsuyama, 1994. "Complementaries and Cumulative Processes In Models of Monopolistic Competition," Discussion Papers 1106, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    11. Benavie, Arthur & Grinols, Earl & Turnovsky, Stephen J., 1996. "Adjustment costs and investment in a stochastic endogenous growth model," Journal of Monetary Economics, Elsevier, vol. 38(1), pages 77-100, August.
    12. Benhabib, Jess & Gali, Jordi, 1995. "On growth and indeterminacy: some theory and evidence," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 163-211, December.
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