Policy Interaction and Learning Equilibria

This paper studies fiscal--monetary policy interactions in an endogenous growth model with multiple assets. Under an interest-rate rule, there are two Pareto-ranked balanced growth equilibria. The E-stability principle is used to pin down an equilibrium. Interestingly, expectational indeterminacy arises in which the two equilibria are both E-stable. Although fiscal policy can eliminate the expectational indeterminacy, the equilibrium with a higher growth rate and higher welfare is ruled out; there is a trade-off between determinacy of expectations and economic growth