Indeterminacy in a Two-sector Endogenous Growth Model with Productive Government Spending
We extend the Barro (1990) model of endogenous growth to a two-sector one which consists of pure consumption and investment goods. It is possible that the extended version has a unique balanced growth rate such that for given initial values of state variables, (i) the extended model economy grows at the unique rate right from the beginning or (ii) it has a continuum of equilibrium paths whose growth rates commonly converge to the balanced growth rate. That is, unlike the original one-sector model, it has transitional dynamics in case (ii). We also show that the effects of small changes in some parameters on the balanced growth rate and the price of the consumption good in terms of the investment good are opposite between (i) and (ii).
Keywords and Phrases: Public services, Indeterminacy, A continuum of equilibrium paths, Two-sector endogenous growth.
JEL Classification Numbers: O41, E62, E32.
GSE, Kobe University
GSE, Osaka University
Research Institute for Economics and Business Administration
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