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The Macroeconomics of TANSTAAFL

  • Volker Grossmann
  • Thomas Steger
  • Timo Trimborn

This paper shows that dynamic inefficiency can occur in dynamic general equilibrium models with fully optimizing, infinitely-lived households even in a situation with underinvestment. We identify necessary conditions for such a possibility and illustrate it in a standard R&D-based growth model. Calibrating the model to the US, we show that a moderate increase in the R&D subsidy indeed leads to an intertemporal free lunch (i.e., an increase in per capita consumption at all times). Hence, Milton Friedman’s conjecture There ain’t no such thing as a free lunch (TANSTAAFL) may not apply.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2011/wp-cesifo-2011-11/cesifo1_wp3651.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3651.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3651
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