Abstract:
Optimal growth models are designed to explain how the main economic aggregates evolve over time, from a given initial state to a long term steady state. In particular, endogenous growth models describe how a convergence (or divergence) process towards (away from) a constant growth scenario takes place. This process involves transitional dynamics, but typically there is a fundamental item that escapes dynamic adjustment: demand is, in every moment of time, equal to the output level, i.e., the goods market always clears. In the present paper, we develop an endogenous growth model in which market clearing is a long term possibility instead of an every period implicit assumption: the system may converge to a market equilibrium outcome in the same way it can converge to a state of constant growth. The implications of this modelling structure are essentially the following: a market clearing equilibrium may coexist with other equilibrium points; several types of stability outcomes are possible to achieve; monetary policy becomes relevant to growth.
