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Complementarities, Costly Investment and Multiple Equilibria in a One-Sector Endogenous Growth Model

In this paper we develop a multiple equilibria one-sector R&D-based growth model, in which the key aspects are the assumption of complementarities between capital goods in the production function and the assumption of costly investment in capital. This second assumption is new to the R&D-based literature. The equilibrium solutions are obtained when the Preferences curve, which mirrors consumers’ savings decisions, and the Technology curve, which represents equilibria on the production side, cross. The combination of the two key assumptions produces a non-linear Technology curve, which consequently crosses the Preferences curve more than once, thus generating multiple equilibria. A numerical solutions exercise obtains two equilibria. Application of the stability under learning criterion allows for the identification of the two equilibria as stable. Expectations can lead the economy to either the equilibrium characterised by high-growth and high-interest rates, or to the equilibrium characterised by low-growth and low-interest rates. Hence, with this model, we wish to contribute to endogenous growth literature by providing a mechanism to explain how an economy can experience multiple equilibria situations.

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Paper provided by NIPE - Universidade do Minho in its series NIPE Working Papers with number 7/2003.

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Date of creation: 2003
Date of revision:
Handle: RePEc:nip:nipewp:7/2003
Contact details of provider: Postal: Núcleo de Investigação em Políticas Económicas, Escola de Economia e Gestão, Universidade do Minho, P-4710-057 Braga, Portugal
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  1. Benhabib, Jess & Gali, Jordi, 1995. "On Growth and Indeterminacy: Some Theory and Evidence," Working Papers 95-08, C.V. Starr Center for Applied Economics, New York University.
  2. Benavie, Arthur & Grinols, Earl & Turnovsky, Stephen J., 1996. "Adjustment costs and investment in a stochastic endogenous growth model," Journal of Monetary Economics, Elsevier, vol. 38(1), pages 77-100, August.
  3. Evans, Geroge W & Honkapohja, Seppo & Romer, Paul, 1998. "Growth Cycles," American Economic Review, American Economic Association, vol. 88(3), pages 495-515, June.
  4. van der Ploeg, Frederick, 1996. "Budgetary Policies, Foreign Indebtedness, the Stock Market, and Economic Growth," Oxford Economic Papers, Oxford University Press, vol. 48(3), pages 382-96, July.
  5. Luis A. Rivera-Batiz & Paul M. Romer, 1990. "Economic Integration and Endogenous Growth," NBER Working Papers 3528, National Bureau of Economic Research, Inc.
  6. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
  7. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-24, January.
  8. Benhabib, Jess & Perli, Roberto & Xie, Danyang, 1994. "Monopolistic competition, indeterminacy and growth," MPRA Paper 37411, University Library of Munich, Germany, revised 1994.
  9. repec:tpr:qjecon:v:105:y:1990:i:2:p:501-26 is not listed on IDEAS
  10. Cohen, Daniel, 1993. "Growth and external debt," CEPREMAP Working Papers (Couverture Orange) 9302, CEPREMAP.
  11. Silvestre, Joaquim, 1993. "The Market-Power Foundations of Macroeconomic Policy," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 105-41, March.
  12. Kiminori Matsuyama, 1995. "Complementarities and Cumulative Processes in Models of Monopolistic Competition," Journal of Economic Literature, American Economic Association, vol. 33(2), pages 701-729, June.
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