Collaborative Research on Dynamic General Equilibrium Theorywith Distortions

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This project studies dynamic general equilibrium models with distortions. There are two main areas of concern. The first of these deals with the theoretical properties of price taking models with distortions in general (that is, existence, uniqueness, etc.). This is basic research studying the internal consistency of the Walrasian view of economics in environments in which government policy plays an important role. The second area is the more specialized area of the determinants of growth. The emphasis here is on the types of and quantitative nature of the effects of government policies on development. Three distinct projects will be investigated. The first concerns the form of optimal (Ramsey) taxation in models of endogenous growth and involves the estimation of the productive role played by government expenditures (for example, schooling). This will be accomplished through the analysis of the steady state equations from a completely specified general equilibrium model. The second project concerns the effect of monetary policy and inflation on the rate of growth or development of an economy. This has been identified as a quantitatively important policy variable in the empirical literature on the determinants of growth. The last project studies the alterations which arise in the theory of endogenous growth under conditions of uncertainty. Very little work has been done in this area to this point. An example identified as important in the empirical literature is the depressing effect on growth of an increase in the variance of the monetary expansion rule. The last few years have seen a virtual explosion of work on models of endogenous growth. This is because of the importance of these models in helping our understanding of the process of growth and development. A full development of both empirical and theoretical research in this area will bring us to a deeper understanding of both the successes (for example, Japan and Korea) of the last 40 years as well as the failures (for example, Chad). Taken as a whole, the research will make a serious contribution to this effort. In particular, the work on inflation and growth and growth and uncertainty will be of particular use since these factors have already been identified as important explanatory variables in the empirical literature.