One Sector Models, Indeterminacy, and Productive Public Spending

This paper studies the influence of different modelling assumptions on the determinacy of the steady state in one—sector models of economic growth with externalities in the production function. We show that productive public spending subject to congestion, combined with variable capital utilization, can lead to indeterminacy at very low degrees of social increasing returns to scale. We perform a calibration of the model to the tax regimes observed in the USA. We shed some light on the conflicting effects of progressive taxation on the steady state stability reported in the literature. Finally, we extensively discuss the features of the model that lead to an indeterminate rather than an explosive steady state once the saddle—path stability is broken.