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The macroeconomics of TANSTAAFL

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  • Grossmann, Volker
  • Steger, Thomas M.
  • Trimborn, Timo

Abstract

Market imperfections may lead to underinvestment in dynamic general equilibrium models. An interesting but unexplored question is whether policy interventions which attenuate underinvestment gaps necessarily imply that consumption will initially decline. By employing a calibrated version of a standard R&D-based growth model, we show that raising the R&D subsidy rate may not only close the R&D underinvestment gap but also raise consumption per capita at all times (“intertemporal free lunch”). We also discuss the general mechanics of such an intertemporal free lunch in both one-sector and multi-sector growth models and further examples.

Suggested Citation

  • Grossmann, Volker & Steger, Thomas M. & Trimborn, Timo, 2013. "The macroeconomics of TANSTAAFL," Journal of Macroeconomics, Elsevier, vol. 38(PA), pages 76-85.
  • Handle: RePEc:eee:jmacro:v:38:y:2013:i:pa:p:76-85
    DOI: 10.1016/j.jmacro.2013.06.004
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    More about this item

    Keywords

    Intertemporal free lunch; Endogenous growth; R&D underinvestment; Transitional dynamics;

    JEL classification:

    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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