It is by now well known that, in the presence of even mild imperfections, the standard infinite horizon model of the macroeconomy often supports an indeterminate set of equilibria. This paper shows that the assumption of maximizing individuals, if used consistently, provides an endogenous equilibrium selection mechanism.
Growth, externalities, and indeterminate equilibria
FERRAGUTO, GIUSEPPE
2007
Abstract
It is by now well known that, in the presence of even mild imperfections, the standard infinite horizon model of the macroeconomy often supports an indeterminate set of equilibria. This paper shows that the assumption of maximizing individuals, if used consistently, provides an endogenous equilibrium selection mechanism.
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