Multiple Equilibria in the Endogenous Economic Growth Model with the Cash-in-Advance Constraint
In previous studies, it is well known that equilibria can be indeterminate when the cash-in-advance constraint is binding. This paper extends these previous studies to the case where the economy grows endogenously. The extension is particularly noteworthy because temporarily different growth rates can make the levels of capital stocks persistently different in the endogenous growth model. We show that when the cash-in-advance constraint applies only to consumption, multiple equilibrium paths are more likely outcome in the endogenous growth economy. We also show that when the equilibrium path is a sunspot equilibrium, a deviation from the balanced growth path can accelerate the expected growth rates of consumption both in the short-run and in the long-run. However, any deviation from the balanced growth path never improves social welfare and requires the role of discretionary monetary policy.
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