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

Salvador Ortigueira
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Salvador Ortigueira: Department of Economics, Cornell University

No 9901, Working Papers from Centro de Investigacion Economica, ITAM

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.

Pages: 30 pages
Date: 1999-09
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:cie:wpaper:9901

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