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

  • Salvador Ortigueira

    (Department of Economics, Cornell University)

Registered author(s):

    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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    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. David Aschauer, 1988. "Is public expenditure productive?," Staff Memoranda 88-7, Federal Reserve Bank of Chicago.
    2. Sala-I-Martin, X. & Barro, R.J., 1991. "Public Finance in Models of Economic Growth," Papers 640, Yale - Economic Growth Center.
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    19. Karl Shell, 2010. "Toward A Theory of Inventive Activity and Capital Accumulation," Levine's Working Paper Archive 1407, David K. Levine.
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