Hostname: page-component-586b7cd67f-t7czq Total loading time: 0 Render date: 2024-11-23T05:15:55.278Z Has data issue: false hasContentIssue false

POLICY INTERACTION AND LEARNING EQUILIBRIA

Published online by Cambridge University Press:  11 November 2011

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: [email protected].

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.

Type
Notes
Copyright
Copyright © Cambridge University Press 2011 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Alonso-Carrera, Jaime (2001) “On learning to forecast in an endogenous growth model with externalities. Journal of Economic Dynamics and Control 25, 11391156.CrossRefGoogle Scholar
Bencivenga, Valerie R. and Smith, Bruce D. (1991) Financial intermediation and endogenous growth. Review of Economic Studies 58, 195209.CrossRefGoogle Scholar
Benhabib, Jess and Wen, Yi (2004) Indeterminacy, aggregate demand, and the real business cycle. Journal of Monetary Economics 51, 503530.CrossRefGoogle Scholar
Carlstrom, Charles T. and Fuerst, Timothy S. (2001) Timing and real indeterminacy in monetary models. Journal of Monetary Economics 47, 285298.CrossRefGoogle Scholar
Espinosa-Vega, Marco A. and Yip, Chong K. (1999) Fiscal and monetary policy interactions in an endogenous growth model with financial intermediaries. International Economic Review 40, 595613.CrossRefGoogle Scholar
Evans, George W. and Honkapohja, Seppo (2001) Learning and Expectations in Macroeconomics. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
Evans, George W. and Honkapohja, Seppo (2005) Policy interaction, expectations and the liquidity trap. Review of Economic Dynamics 8, 303323.CrossRefGoogle Scholar
Evans, George W. and Honkapohja, Seppo (2007) Policy interaction, learning, and the fiscal theory of prices. Macroeconomic Dynamics 11, 665690.CrossRefGoogle Scholar
Evans, George W., Honkapohja, Seppo M.S., and Marimon, Ramon (2007) Stable sunspot equilibria in a cash-in-advance economy. B.E. Journal of Macroeconomics 7 (1), (Advances), Article 3.CrossRefGoogle Scholar
Evans, George W., Honkapohja, Seppo, and Romer, Paul (1998) Growth cycles. American Economic Review 88, 495515.Google Scholar
Hahn, Frank and Solow, Robert (1997) A Critical Essay on Modern Macroeconomic Theory. Cambridge, MA: MIT Press.Google Scholar
Itaya, Jun-ichi and Mino, Kazuo (2004) Interest-rate rule and multiple equilibria with endogenous growth. Economics Bulletin 5, 18.Google Scholar
Kaas, Leo and Weinrich, Gerd (2003) Money and growth in a production economy with multiple assets. Macroeconomic Dynamics 7, 670690.CrossRefGoogle Scholar
Kudoh, Noritaka (2007) Low nominal interest rates: A public finance perspective. International Journal of Central Banking 3, 6193.Google Scholar
Lucas, Robert E. Jr., and Stokey, Nancy (1983) Optimal fiscal and monetary policy in an economy without capital. Journal of Monetary Economics 12, 5593.CrossRefGoogle Scholar
McCallum, Bennett T. (2007) E-stability vis-a-vis determinacy results for a broad class of linear rational expectations models. Journal of Economic Dynamics and Control 31, 13761391.CrossRefGoogle Scholar
Moore, Bartholomew J. (1993) Least-squares learning and the stability of equilibria with externalities. Review of Economic Studies 60, 197208.CrossRefGoogle Scholar
Saint-Paul, Gilles (1992) Fiscal policy in an endogenous growth model. Quarterly Journal of Economics 107, 12431259.CrossRefGoogle Scholar
Sargent, Thomas J (1993) Bounded Rationality in Macroeconomics. Oxford: Oxford University Press.CrossRefGoogle Scholar
Sargent, Thomas J (1999) A primer on monetary and fiscal policy. Journal of Banking and Finance 23, 14631482.CrossRefGoogle Scholar
Schmitt-Grohé, Stephanie and Uribe, Martín (2000) Price level determinacy and monetary policy under a balanced-budget requirement. Journal of Monetary Economics 45, 211246.CrossRefGoogle Scholar
Van Zandt, Timothy and Lettau, Martin (2003) Robustness of adaptive expectations as an equilibrium selection device. Macroeconomic Dynamics 7, 89118.CrossRefGoogle Scholar