Indeterminacy and intergenerational redistribution

Starting date
October 1, 2004
Duration (months)
12
Departments
Economics
Managers or local contacts
Cipriani Giam Pietro

Recent years have seen an extensive research on the possibility of indeterminate equilibria in dynamic general equilibrium models.
This literature is motivated by the difficulties in explaining differences in growth in different countries and accounting for various empirically observed growth paths by means of the usual economic fundamentals.
Indeterminacy of equilibria can be either global or local. The first kind corresponds to multiple balanced growth paths, while the second kind refers to multiplicity of transition paths leading to a given BGP. Multiplicity of equilibrium paths can explain why otherwise similar countries may be characterised by different per capita incomes and/or different growth rates.
In general, it has been shown that indeterminacy is the consequence of non-decreasing returns to capital, monopolistic competition or some form of production externalities that generate non-decreasing returns at the social level - that is, of what may generate persistent growth in the first place.
We, instead, propose to focus on the role of fiscal policy - that redistributes between generations - in opening the door to multiplicity, when agents invest independently in their human capital and longevity is increasing with aggregate human capital.
A number of studies have found human capital and its various proxies to have important impacts on adult health and longevity. We want to study how intergenerational transfers distort human capital accumulation for any given rationally anticipated longevity, and thereby affect actual longevity. If investment in human capital is indeed responsive to the tax particulars, then intergenerational transfers can generate indeterminate equilibria, and in particular local indeterminacy. Local indeterminacy implies that expectations determine the equilibrium path, since the initial human capital investment is freely chosen. So, we will study if the introduction of intergenerational transfers, by providing an external effect, creates an expectations coordination failure. In other words, we will set up a model where private and public actions may fail to coordinate, and the economy becomes prone to sunspot equilibria, due to the growth effects of intergenerational redistribution.

Sponsors:

Funds: assigned and managed by the department

Project participants

Collaboratori esterni

Miltos Makris
University of Exeter Department of Economics Lecturer