Public spending, endogenous growth, and endogenous fluctuations

This article studies indeterminacy and endogenous growth in a simple one-sector model of capital accumulation, endowed with inelastic labor supply, in which the presence of public goods creates positive externalities both in the production and the consumption sectors. Because of increasing returns in the utility function, the economy exhibits not only perpetual growth but also indeterminacy and. therefore. endogenous stochastic growth fluctuations. The possibility of sunspot equilibrium growth paths is shown to be consistent with plausible parameter values. (C) 1996 Academic Press, Inc.