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POLICY INTERACTION AND LEARNING EQUILIBRIA

Published online by Cambridge University Press:  11 November 2011

Noritaka Kudoh
Noritaka Kudoh*
Affiliation:
Hokkaido University
*
Address correspondence to: Noritaka Kudoh, Department of Economics, Kita 9 Nishi 7, Kita-ku, Sapporo 060-0809, Japan; e-mail: kudoh@econ.hokudai.ac.jp.
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Abstract

This note studies fiscal–monetary policy interactions in an endogenous growth model with multiple assets. The “growth-rate Laffer curve” clarifies an important tension between economic growth and government revenue and reveals that higher economic growth does not always finance a larger budget deficit. There are two Pareto-ranked balanced-growth equilibria, which can both be E-stable. Although fiscal policy can eliminate the expectational indeterminacy, it rules out the equilibrium with a higher growth rate and higher welfare. Near the lower bound of the nominal interest rate, an arbitrarily small budget deficit will select the low-growth equilibrium to be the unique E-stable equilibrium.

Keywords

Endogenous GrowthPublic DebtIndeterminacyE-Stability
Type
Notes
Information
Macroeconomic Dynamics , Volume 17 , Issue 4 , June 2013 , pp. 920 - 935
Copyright
Copyright © Cambridge University Press 2011 

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