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POLICY INTERACTION AND LEARNING EQUILIBRIA

Published online by Cambridge University Press:  11 November 2011

Noritaka Kudoh
Affiliation:
Hokkaido University
Corresponding
E-mail address:

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.

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Notes
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Copyright © Cambridge University Press 2011 

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