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The Macroeconomics of TANSTAAFL

Autor: Volker Grossmann, Thomas M. Steger and Timo Trimborn
Nummer: 482, Nov 2011, pp. 22
JEL-Class: E20, H20, O41

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 pos- sibility 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 Friedmanís conjecture There ainít no such thing as a free lunch (TANSTAAFL) may not apply.

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