Indeterminacy in a matching model of money with productive government expenditure

This study explores the effects of inflation on economic growth in a two-sector monetary search-and-matching model with productive government expenditure, which yields novel results on the indeterminacy and multiplicity of equilibria in the search-and matching model. Specifically, when labor intensity of production in the centralized market is below a threshold, the economy features a unique balanced growth path along which inflation reduces growth. When labor intensity in the centralized market is above the threshold and the matching probability in the decentralized market is sufficiently high, the economy features two balanced growth paths, in which one path exhibits high growth whereas the other exhibits low growth. We find that inflation has very different effects on growth along these two paths as a result of productive government expenditure.