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

  • Salvador Ortigueira

    (Department of Economics, Cornell University)

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    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. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S103-26, October.
    2. Benhabib, J. & Rustichini, A. & Velasco, A., 1996. "Public Capital and Optimal Taxes Without Commitment," Working Papers 96-19, C.V. Starr Center for Applied Economics, New York University.
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    7. Chamley, Christophe, 1993. "Externalities and Dynamics in Models of "Learning or Doing."," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(3), pages 583-609, August.
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    17. Karl Shell, 2010. "Toward A Theory of Inventive Activity and Capital Accumulation," Levine's Working Paper Archive 1407, David K. Levine.
    18. Lynde, Catherine & Richmond, J, 1993. "Public Capital and Total Factor Productivity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(2), pages 401-14, May.
    19. Morrison, Catherine J & Schwartz, Amy Ellen, 1996. "State Infrastructure and Productive Performance," American Economic Review, American Economic Association, vol. 86(5), pages 1095-1111, December.
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    22. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, vol. 4(3), pages 345-80.
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