Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/205236
Authors: 
Vasilev, Aleksandar
Year of Publication: 
2019
Citation: 
[Journal:] Journal of Economics and Econometrics [ISSN:] 2032-9660 [Issue:] Forthcoming
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.
Subjects: 
Equilibrium indeterminacy
government production
animal spirits
two-sector model
JEL: 
E32
E22
Document Type: 
Article
Document Version: 
Accepted Manuscript (Postprint)

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