Increasing Social Returns, Learning and 'Catastrophe' Phenomena

We develop a new microeconomic formulation for increasing social returns to labour in an overlapping generations model with production. The economy con have two stable steady states under learning behaviour. Changes in fiscal policies can cause 'catastrophe' phenomena in which the economy moves from a high-activity equilibrium to a low-activity one or vice versa. Welfare consequences of government spending financed by seignorage and production subsidies financed by lump-sum taxes are analyzed. Policy changes can have irreversible beneficial or detrimental consequences. An inefficiently large subsidy may temporarily be required to push the economy towards its global optimum. 

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