Indeterminacy and multiplicity of equilibria in a two-sector economy with a public-sector production

Vasilev, Aleksandar (2019) Indeterminacy and multiplicity of equilibria in a two-sector economy with a public-sector production. Journal of Economics and Econometrics, 64 (3). pp. 1-16. ISSN 2032-9652

Full content URL: https://ideas.repec.org/a/eei/journl/v64y2021i3p1-...

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Indeterminacy and multiplicity of equilibria in a two-sector economy with a public-sector production
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Abstract

We introduce government production of both output-augmenting and utility-enhancing public services into an exogenous growth model with a detailed government sector, and calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2016). We show that in contrast to the case without government output, e.g., Vasilev (2009), when the economy features saddle-path stability, the presence of a second sector leads to equilibrium indeterminacy in the model. When public sector production adds to private sector output, the setup exhibits "sink" dynamics, and equilibrium paths are determined by "animal spirits." These results are
in line with the findings in the literature, e.g., Benhabib and Farmer (1994, 1996) and Farmer (1999), and have major implications for policy-making and welfare.

Keywords:Equilibrium indeterminacy, animal spirits, two-sector model, government production, Bulgaria
Subjects:L Social studies > L130 Macroeconomics
Divisions:Lincoln International Business School
ID Code:46887
Deposited On:30 Nov 2021 10:31

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