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The Macroeconomics of TANSTAAFL

  • Volker Grossmann
  • Thomas M. Steger
  • Timo Trimborn

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"). Hence, Milton Friedman’s conjecture 'There ain’t no such thing as a free lunch' (TANSTAAFL) may not apply. We also discuss the mechanics of an intertemporal free lunch and further examples.

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Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c017_041.

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Length: 30 pages JEL Classification: E20, H20, O41
Date of creation: Sep 2012
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Handle: RePEc:deg:conpap:c017_041
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