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Fiscal policy rules in an overlapping generations model with endogenous labour supply

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  • Ganelli, Giovanni

Abstract

A fiscal policy rule in which taxation is a function of existing government debt (a "wealth-tax") is usually believed to be effective in providing stability. Using a dicrete-time version of Blanchard's overlapping generations model, extended to include money and an endogenous labour supply we show that, contrary to the intuition, a wealth tax might not be enough to ensure the existence of a unique, well defined, saddle-path equilibrium. We suggest that a government willing to run a positive and sustainable level of debt could use an alternative financing rule, imposing an additional tax component, that is a function of the difference between the real interest rate and the tax rate on wealth.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 31 (2007)
Issue (Month): 3 (March)
Pages: 1015-1036

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Handle: RePEc:eee:dyncon:v:31:y:2007:i:3:p:1015-1036

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  1. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," CEPR Discussion Papers 1131, C.E.P.R. Discussion Papers.
  2. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
  3. Mitchell, Peter R. & Sault, Joanne E. & Wallis, Kenneth F., 2000. "Fiscal policy rules in macroeconomic models: principles and practice," Economic Modelling, Elsevier, vol. 17(2), pages 171-193, April.
  4. Leith, Campbell & Wren-Lewis, Simon, 2000. "Interactions between Monetary and Fiscal Policy Rules," Economic Journal, Royal Economic Society, vol. 110(462), pages C93-108, March.
  5. Neil Rankin & Barbara Roffia, 2003. "Maximum Sustainable Government Debt in the Overlapping Generations Model," Manchester School, University of Manchester, vol. 71(3), pages 217-241, 06.
  6. Ligthart, J.E. & Heijdra, B.J., 2000. "The dynamic macroeconomic effects of tax policy in an overlapping generations model," Open Access publications from Tilburg University urn:nbn:nl:ui:12-141315, Tilburg University.
  7. Christ, Carl F, 1979. "On Fiscal and Monetary Policies and the Government Budget Restraint," American Economic Review, American Economic Association, vol. 69(4), pages 526-38, September.
  8. Rankin, N. & Scalera, D., 1991. "Death and the Keynesian Multiplier," The Warwick Economics Research Paper Series (TWERPS) 376, University of Warwick, Department of Economics.
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Cited by:
  1. Leonor Coutinho, 2003. "Fiscal Policy in the New Open Economy. Macroeconomics and Prospects for Fiscal Policy Coordination," Economics Working Papers 021, European Network of Economic Policy Research Institutes.
  2. Annicchiarico, Barbara, 2003. "Government deficits, wealth effects and the price level in an optimizing model," Working Paper Series 0285, European Central Bank.
  3. Futagami, Koichi & Shibata, Akihisa, 2003. "Budget Deficits and Economic Growth," Discussion Paper 133, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
  4. Leith, Campbell & Wren-Lewis, Simon, 2008. "Interactions between monetary and fiscal policy under flexible exchange rates," Journal of Economic Dynamics and Control, Elsevier, vol. 32(9), pages 2854-2882, September.
  5. Ganelli, Giovanni, 2003. "The New Open Economy Macroeconomics of Government Debt," Royal Economic Society Annual Conference 2003 83, Royal Economic Society.

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