The Macroeconomics of TANSTAAFL
23 Pages Posted: 1 Dec 2011
Date Written: November 30, 2011
Abstract
This paper shows that dynamic inefficiency can occur in dynamic general equilibrium models with fully optimizing, infinitely-lived households even in a situation with underinvestment. We identify necessary conditions for such a possibility and illustrate it in a standard R&D-based growth model. Calibrating the model to the US, we show that a moderate increase in the R&D subsidy indeed leads to an intertemporal free lunch (i.e., an increase in per capita consumption at all times). Hence, Milton Friedman’s conjecture There ain’t no such thing as a free lunch (TANSTAAFL) may not apply.
Keywords: intertemporal free lunch, dynamic inefficiency, R&D-based growth, transitional dynamics
JEL Classification: E200, H200, O410
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