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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Paper provided by NIPE - Universidade do Minho in its series NIPE Working Papers with number
7/2003.
Find related papers by JEL classification: O0 - Economic Development, Technological Change, and Growth - - General D5 - Microeconomics - - General Equilibrium and Disequilibrium D9 - Microeconomics - - Intertemporal Choice and Growth
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Evans, Geroge W & Honkapohja, Seppo & Romer, Paul, 1998.
"Growth Cycles,"
American Economic Review,
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[Downloadable!] (restricted)
Other versions:
Paul Romer & George Evans & Seppo Hokapohja, .
"Growth Cycles,"
Home Pages
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[Downloadable!]
George Evans & Seppo Honkapohja & Paul Romer, 1996.
"Growth Cycles,"
NBER Working Papers
5659, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)