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Global indeterminacy and equilibrium selection in a model with depletion of non-renewable resources

Giovanni Bella () and Paolo Mattana ()
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Giovanni Bella: University of Cagliari
Paolo Mattana: University of Cagliari

Decisions in Economics and Finance, 2018, vol. 41, issue 2, No 5, 187-202

Abstract: Abstract We use the principles of global bifurcation analysis to explore the role of fiscal policy in a model where non-renewable depletion presents stock effects. Initially, we show that fiscal policy may induce the onset of two coexisting steady states, one of which is characterized by a lower depletion rate and higher income (virtuous steady state) than the other (bad steady state). Then, we shed light on the ability of an endogenous fiscal policy to act as an equilibrium selection device. We find that when the economy is sufficiently patient and exhibits low capital returns and environmental parameters, fiscal policy can create a continuum of equilibria that leads to the virtuous steady state. In the opposite situation of an impatient economy, which has high capital returns and environmental parameters, fiscal policy can only create one perfect-foresight path (a heteroclinic trajectory) through which the economy can approach the virtuous steady state.

Keywords: Environmental taxation; Multiple balanced growth paths; Global bifurcation analysis; Policy-induced heteroclinic orbits (search for similar items in EconPapers)
JEL-codes: C62 O11 O41 Q56 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1007/s10203-018-0218-z

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