Indeterminate equilibrium growth with product and R&D spillovers

Abstract

The paper revisits an endogenously growing economy à la Romer (1990) to explore the possibility of local and global indeterminacy where, along with the usual R&D spillover, a manufacturing sector generates a product spillover on R&D. When the product spillover facilitates R&D, the dynamic market equilibrium is unique and determinate. However, when the product spillover is strongly negative on R&D, multiple balanced market equilibria emerge and are therefore globally indeterminate. Furthermore, global indeterminacy coexists with local indeterminacy under the joint condition on the intertemporal elasticity of substitution of consumption. Local indeterminacy also emerges when the product spillover is mildly negative in tandem with a high intertemporal elasticity of substitution. Hence, a dynamic market economy with product spillovers in the R&D sector enriches the understanding of observable growth phenomena, including business and growth cycles and income and growth disparity, among countries with the same economic fundamentals.