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

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  • Salvador Ortigueira

    (Department of Economics, Cornell University)

Abstract

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.

Suggested Citation

  • Salvador Ortigueira, 1999. "Equilibrium Indeterminacy in an Endogenous Growth Model: Debt as a Coordination Device," Working Papers 9901, Centro de Investigacion Economica, ITAM.
    • Handle: RePEc:cie:wpaper:9901
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    File URL: http://ftp.itam.mx/pub/academico/inves/ortigueira/9901.pdf
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    References listed on IDEAS

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    Cited by:

    1. Ortigueira, Salvador & Santos, Manuel S., 2002. "Equilibrium Dynamics in a Two-Sector Model with Taxes," Journal of Economic Theory, Elsevier, vol. 105(1), pages 99-119, July.
    2. Manuel Santos, "undated". "On Non-Existence of Markov Equilibria in Competitive-Market Economies," Working Papers 2133305, Department of Economics, W. P. Carey School of Business, Arizona State University.

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