Complementarities and costly investment in a growth model

We develop a one-sector growth model whose key aspect is the combination of the assumptions of internal costly investment in capital and complementarities between capital goods in the production function. Despite the nonlinearity generated by these assumptions, the model delivers a single equilibrium.      

Monetary policy and price level determinacy in a cash-in-advance economy

Summary The paper considers the determinacy of the equilibrium price level in the cash-in-advance monetary economy of Lucas and Stokey (1983, 1987), in the case of deterministic fundamentals. The possibilities both of a multiplicity of perfect foresight equilibria and of sunspot equilibria are considered. Two types of monetary policy regimes are considered and compared, one in which the money supply grows at a given exogenous rate (that may be positive or negative), and one in which the nominal interest rate on one-period government debt is pegged at a given non-negative level. In the case of constant money growth rate regimes, it is shown that one can easily have both indeterminacy of perfect foresight equilibrium and existence of sunspot equilibria; indeed, in the case of negative rates of money growth (as called for by Friedman (1969)), both types of indeterminacy necessarily occur. On the other hand, sufficient conditions for uniqueness of equilibrium (and non-existence of equilibria other than a deterministic steady state) are also given, and a class of cases is identified in which a sufficiently high rate of money growth guarantees this. Thus there may be a conflict between the aims of choosing a rate of money growth that results in a high level of welfare in the steady state equilibrium and choosing a rate that makes this steady state the unique equilibrium.) In the case of the interest rate pegging regimes, sufficient conditions are given for uniqueness of equilibrium (and impossibility of sunspot equilibria), and it is shown that these necessarily hold in the case of any low enough nominal interest rate. Thus the nominal interest rate peg allows simultaneous achievement of price level determinacy and a high level of welfare in the unique (steady state) equilibrium.In this paper I consider the consequences of alternative choices of the monetary policy regime for the determinacy of the rational expectations equilibrium value of money, and in particular for the existence or not of sunspot equilibria, i.e., rational expectations equilibria in which fluctuations in the price level occur in response to random events that represent no change in economic fundamentals, simply due to self-fulfilling revisions of people's expectations. I am interested in particular in making the point that a consideration of the complete set of possible equilibria associated with a given policy regime may alter one's evaluation of the relative desirability of alternative policies, relative to the conclusion that one might reach if one considered only a single possible equilibrium associated with each policy regime (perhaps a unique equilibrium involving a minimum set of state variables). In view of this I give particular attention to policy regimes of types that have sometimes been advocated as ways of reducing the inefficiency associated with a rate of return differential between money and other financial assets, and show that policies that might otherwise be desirable (policies that make possible a more desirable equilibrium than would otherwise be possible) can have the unfortunate consequence of rendering equilibrium indeterminate and making possible equilibrium fluctuations in response to sunspot events.Two classes of policy regimes are considered in particular: on the one hand, alternative constant rates of growth or contraction of the money supply, financed through lump sum taxes or transfers, with zero net government assets at all times; and on the other, alternative constant nominal interest rate pegs, to be maintained through open market operations between money and interest-bearing debt, with an exogenously fixed level of net transfer payments. The first class of policies is considered because of Friedman's (1969) well-known proposal that a constant contraction of the money supply of this sort would be welfare improving. I find that while thestationary equilibrium associated with the Friedman regime achieves the maximum possible level of utility for the representative consumer, and while the level of utility associated with stationary equilibrium may be monotonically decreasing in the rate of money growth, lower rates of money growth (in particular, rates near that called for by Friedman) are associated with indeterminacy of equilibrium and the existence of sunspot equilibria, while these problems need not arise in the case of higher rates of money growth.The second class of policies is considered because they represent an obvious alternative approach to the elimination of the same rate of return differential with which Friedman is concerned. Achievement of permanently low nominal interest rates through a simple interest rate peg is not often advocated; one reason is that it is often asserted that such a policy must result in price level indeterminacy. In fact, I find that if the interest rate pegging regime is properly specified, it results in aunique rational expectations equilibrium, regardless of the level at which interest rates are to be pegged. Thus not only does the interest rate peg not result in price level indeterminacy but it allows nominal interest rates to be maintained permanently at a level lower than that which can be obtained through a policy regime of the first sort without creating price level indeterminacy. It would hence appear, at least in the case of the kind of economy modeled here, that interest rate pegging is a more reliable way of trying to reduce the inefficiency associated with consumers being forced to economize on liquidity.This paper represents a revision of Woodford (1988). I would like to thank Leonardo Auernheimer, Buz Brock, Willem Buiter, Peter Howitt, Teh-Ming Huo, David Laidler, David Levine, Bennett McCallum, and an anonymous referee for helpful comments, and the National Science Foundation for research support.     

Urban unemployment and optimal trade policy in a cash-in-advance economy

This paper examines the welfare effects of commercial and tax/subsidy policies on a developing economy with sectoral unemployment and differential cash-in-advance constraints. The optimal tariff can be negative when the cash-in-advance requirement for buying the importable good is larger than that for the exportable good. In addition, when capital is sectorally mobile, production taxes are superior to production subsidies to the importable sector. Nevertheless, to reach the first-best optimum, a uniform wage subsidy to both sectors is required.     

Critical survey. Endogenous growth theory: a critical assessment

A critical assessment is made of endogenous growth theory fromthe perspective of recent developments within economics as adiscipline. These include its increasing mathematical formalisation,its focus upon microfoundations, the casual use of econometricsto test models, and the incorporation of factors that have traditionallybeen outside mainstream economics. It is found that the theoryfocuses upon market imperfections and technological progressin a variety of ways, and reconstructs their impact upon themacroeconomy as a growth rather than as a level effect. Whilstthe growth rate is endogenised, this leads to the problem ofmultiple equilibria and extremely complex dynamics. The generalisationfrom exogenous growth theory is, however, associated with evenmore extreme assumptions and analytical distance from the socioeconomicprocesses of growth itself.     

Health and infrastructure in a model of endogenous growth

This paper studies the optimal allocation of government spending between infrastructure and health (which affects labor productivity as well as household utility) in an endogenous growth framework. A key feature of the model is that infrastructure affects not only the production of goods but also the supply of health services. The rate of time preference is also endogenously related to health outcomes. The first part considers the case where health enters as a flow in production and utility, whereas the second focuses on a “stock” approach. Growth- and welfare-maximizing rules for income taxation and the allocation of public spending are derived.     

Pollution,abatement and balanced growth

The analysis of endogenous growth models with pollution often concentrates on steady state trajectories, under the assumption that the steady state is in some sense stable. In the present note we provide examples showing that this issue should be dealt with carefully. We use the Rebelo Ak model augmented with a stock of pollutants causing a negative externality. It is found that optimal growth is not necessarily balanced (contrary to the outcome of the standard Rebelo model). Moreover, the existence of the externality may affect long run optimal growth rates.The author is grateful to an anonymous referee for comments. All remaining errors are the author's sole responsibility.     

Welfare and growth impacts of innovation policies in a small, open economy; an applied general equilibrium analysis

We explore how innovation incentives in a small, open economy should be designed in order to achieve the highest welfare and growth. The computable general equilibrium model we develop for the purpose allows for research and development (R&D)-driven endogenous technological change embodied in varieties of capital. We study policy alternatives targeted towards R&D, capital varieties formation, and domestic investments in capital varieties. Subsidising domestic investments, thereby excluding stimuli to world market deliveries, generates less R&D, capital formation, economic growth, and welfare than do the other alternatives, reflecting that the domestic market for capital varieties is limited. In spite of breeding stronger economic growth, a higher number of patents, and a higher share of R&D in total production, direct R&D support generates slightly less welfare than subsidising formation of capital varieties. The costs in terms of welfare relates to a lower production within each variety firm, which in presence of mark-up pricing results in efficiency losses.     

Recursive equilibrium in endogenous growth models with incomplete markets

This paper analyzes the existence of recursive equilibria in a class of convex growth models with incomplete markets. Households have identical CRRA-preferences, production displays constant returns to scale with respect to physical and human capital, and all markets are competitive. There are aggregate productivity shocks that affect aggregate returns to physical and human capital investment (stock returns and wages), and there are idiosyncratic shocks to human capital (idiosyncratic depreciation shocks) that only affect individual human capital returns. Aggregate and idiosyncratic shocks follow a joint Markov process. Conditional on the aggregate state, idiosyncratic shocks are independently distributed over time and identically distributed across households. Finally, households have the opportunity to trade assets in zero net supply with payoffs that depend on the aggregate shock, but markets are incomplete in the sense that there are no assets with payoffs depending on idiosyncratic shocks. It is shown that there exists a recursive equilibrium for which equilibrium prices (returns) only depend on the exogenous aggregate shock variable (the wealth distribution is not a relevant state variable). Moreover, the allocation associated with this recursive equilibrium is identical to the equilibrium allocation of an economy in which households live in autarky and face both aggregate and idiosyncratic risk.I would like to thank for helpful comments Peter Howitt, Bob Lucas, Michael Magill, Tomo Nakajima, Herakles Polemarchakis, Martine Quinzii, Kevin Reffett, an anonymous referee, and seminar participants at various universities and conferences.     

Inflation and growth: Explaining a negative effect

The paper presents a monetary model of endogenous growth and specifies an econometric model consistent with it. The economic model suggests a negative inflation-growth effect, and one that is stronger at lower levels of inflation. Empirical evaluation of the model is based on a large panel of OECD and APEC member countries over the years 1961–1997. The hypothesized negative inflation effect is found comprehensively for the OECD countries to be significant and, as in the theory, to increase marginally as the inflation rate falls. For APEC countries, the results from using instrumental variables also show significant evidence of a similar behavior. The nature of the inflation-growth profile and differences in this between the regions are interpreted with the credit production technology of the model in a way not possible with a standard cash-only economy. Research assistance by László Konya, Rezida Zakirova, and Anton Nakov and comments by Michal Kejak, Myles Wallace and Toni Braun are kindly acknowledged, along with comments from the 17^th European Economic Association Meetings, Venice, and the 10^th International Panel Data Conference, Berlin. We also thank the editors and referees for valuable comments, and the first author is grateful to Central European University for research funds.     

Money and credit with limited commitment and theft

We study the interplay among imperfect memory, limited commitment, and theft, in an environment that can support monetary exchange and credit. Imperfect memory makes money useful, but it also permits theft to go undetected, and therefore provides lucrative opportunities for thieves. Limited commitment constrains credit arrangements, and the constraints tend to tighten with imperfect memory, as this mitigates punishment for bad behavior in the credit market. Theft matters for optimal monetary policy, but at the optimum theft will not be observed in the model. The Friedman rule is in general not optimal with theft, and the optimal money growth rate tends to rise as the cost of theft falls.     

Efficiency, depth and growth: Quantitative implications of finance and growth theory

We develop a parsimonious finance and endogenous growth model with microeconomic frictions in entrepreneurship and a role for credit constraints. We demonstrate that though an efficiency–growth relation will always exist, the efficiency–depth–growth relation may not. This has implications for the connection between the theory and empirics of finance and growth. We go on to ask whether the model can account for some historical trends in growth, financial depth and financial efficiency for the UK over the period 1850–1913. The best model of finance and growth is one that departs from the standard depth–growth link.     

Rate of profit and interest in a growth theory with endogenous money

This paper attempts to incorporate an endogenous money approachinto post-Keynesian growth theory in order to derive the fullemployment equilibrium rate of interest as well as that of profit.This rate of interest, named the ideal rate of interest, differsfrom the rate of profit in that it is in proportion to a monetaryvariable, not a real variable. Further, the rate of profit alsodiffers from the rate of interest as a premium because it isproductive. The rate of interest could be important in explainingcircumstances in which financial capital has been accumulatedin excess.     

Culture and human capital in a two-sector endogenous growth model

Recent literature in the field of cultural economics highlights a possible inversion in the usual causality relation (from economic growth to culture) and points out that culture may represent an important driver of economic growth. By viewing culture in line with Throsby’s (2001) definition of cultural capital (i.e., an asset of tangible and intangible cultural expressions), in this article we analyze one possible channel through which culture may positively affect economic growth, namely the existence of a relationship of complementarity between cultural and human capital investments. Using a two-sector endogenous growth model, we find that in the long run a higher growth rate of real per-capita income can be attained the more cultural and human capital investments are complementary for each other in the process leading to agents’ skill acquisition. We also analyze the conditions under which an increase of the cultural capital share in total GDP can be conducive to a rise of real per-capita income.     

Inequality,unemployment, and endogenous growth in a political economy with a minimum wage

This paper presents development of an endogenous growth model with heterogeneous households and political determination of the minimum wage. We investigate the interaction of inequality, unemployment, and economic growth. First, the arguments in this paper show that a positive correlation exists between inequality and unemployment, Second, the interaction between inequality and economic growth is shown to be a positive relation if high inequality pertains in a society. It is a negative relation if low inequality pertains.      

财政分权框架下的财政政策和货币政策

本文扩展了Barro( 1 990 )和Gong和Zou( 2 0 0 2 )的模型 ,讨论财政分权框架下的政府财政政策和货币政策 ,通过消费者行为、地方政府行为和中央政府行为之间Nash均衡解 ,得到了经济增长率和各参数的隐式关系 ,并且通过数值模拟得到经济增长率与各种税收以及政府间转移支付的关系。我们发现经济增长率和收入税的关系是Laffer曲线 ,消费税对经济增长的影响是正的 ,财产税对经济增长的影响是负的。至于货币政策的影响 ,我们发现货币不再是超中性的了 ,供应量增加可以促进经济增长 ,而且经济中的货币的流通程度越高 ,经济增长率越高。最后 ,本文还讨论了多级地方政府的情况 ,分析了不同税收制度的地区对整个经济增长的不同影响。     

Money and storage in a differential information economy

Summary Is the use of fiat money essential in any efficient organization of exchange? We investigate this question in economies that are generalizations of the Townsend (1980) turnpike model that include limited commitment and differential information. We show that in the Townsend turnpike model fiat money is not essential unless there is limited commitment. Furthermore, fiat money has no role whenever there is storage with positive returns. In the presence of differential information fiat money is essential in overcoming incentive problems. This is the case even if there is storage with positive returns.We wish to thank Bart Taub, Anne Villamil and seminar participants at the University of Chicago, the Federal Reserve Bank of Minneapolis, Ohio State, the 1994 North American Summer Meeting of the Econometric Society, SEDC 1994, and Oberwolfach 1994.     

Money and credit in a Keynesian model of income determination

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Redistribution and growth: Pareto improvements

This paper analyzes the relationship between income distribution and economic growth. It introduces heterogeneous households who have preferences for leisure into Grossman and Helpman's model of endogenous growth (in which income distribution has no effect on economic growth). Wealth distribution affects the endogenous rate of growth as the labor supply of each individual responds inversely to his permanent income. When the labor Engel curve is concave (convex), unequal wealth distribution decreases (increases) the rate of growth. Pareto-improving-growth-enhancing wealth redistributions are characterized.     

Equilibrium dynamics in discrete-time endogenous growth models with social constant returns

The existing literature establishes possibilities of local determinacy and dynamic indeterminacy in continuous-time two-sector models of endogenous growth with social constant returns. The necessary and sufficient condition for local determinacy is that the factor intensity rankings of the two sectors are consistent in the private/physical and social/value sense. The necessary and sufficient condition for dynamic indeterminacy is that the final (consumable) good sector is human (pure) capital intensive in the private sense but physical (consumable) capital intensive in the social sense. This paper re-examines the dynamic properties in a discrete-time endogenous growth framework and finds that conventional propositions obtained in continuous time need not be valid. It is shown that the established necessary and sufficient conditions on factor intensity rankings for local determinacy and dynamic indeterminacy are neither sufficient nor necessary, as the magnitudes of time preference and capital depreciation rates both play essential roles. We have benefitted from discussion with Robert Becker, Eric Bond, Michael Kaganovich, Karl Shell and participants of the Midwest Macroeconomic Conference in Chicago and the Midwest Economic Theory and International Trade Meetings at Indiana University. The fourth author acknowledges financial support from the Institute of Economics and Business Administration of Kobe University and the Institute of Economic Research of Kyoto University to enable this international collaboration.