Indeterminacy in a matching model of money with productive government expenditure

Abstract

This study explores the e¤ects of in ‡ation on economic growth in a monetary searchand-matching model with productive government expenditure. Our results can be summarized as follows. When labor intensity in the production function is below a threshold value, the economy features a unique balanced growth equilibrium in which in ‡ation reduces economic growth. When labor intensity in the production function is above a threshold value, the economy may feature multiple balanced growth paths. Multiple equilibria (i.e., global indeterminacy) arise when the matching probability in the decentralized market is su¢ciently large. In this case, the high-growth equilibrium features a negative e¤ect of in ‡ation on economic growth whereas the low-growth equilibrium features a U-shaped e¤ect of in ‡ation on growth. Furthermore, under a su¢ciently large matching probability in the decentralized market, both equilibria are locally determinate, and hence, either equilibrium may emerge in the economy.

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