The Macroeconomics of TANSTAAFL

23 Pages Posted: 1 Dec 2011

See all articles by Volker Grossmann

Volker Grossmann

University of Fribourg - Faculty of Economics and Social Science; Institute for the Study of Labor (IZA); CESifo (Center for Economic Studies and Ifo Institute)

Thomas Michael Steger

University of Leipzig/Institute for Theoretical Economics/Macroeconomics; CESifo (Center for Economic Studies and Ifo Institute)

Timo Trimborn

Leibniz Universität Hannover

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

Suggested Citation

Grossmann, Volker and Steger, Thomas Michael and Trimborn, Timo, The Macroeconomics of TANSTAAFL (November 30, 2011). CESifo Working Paper Series No. 3651, Available at SSRN: https://ssrn.com/abstract=1966959 or http://dx.doi.org/10.2139/ssrn.1966959

Volker Grossmann

University of Fribourg - Faculty of Economics and Social Science ( email )

Fribourg, CH 1700
Switzerland

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Thomas Michael Steger (Contact Author)

University of Leipzig/Institute for Theoretical Economics/Macroeconomics ( email )

Grimmaische Str. 12
D-04109 Leipzig
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Timo Trimborn

Leibniz Universität Hannover ( email )

Welfengarten 1
D-30167 Hannover, 30167
Germany

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