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Fiscal policy and fluctuations in a monetary model of growth

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  • Bosi, Stefano
  • Magris, Francesco

Abstract

We consider an infinite horizon economy with representative agent, aggregate externalities on capital/labor ratio and liquidity constraint on income taxes. We show that the stationary rate of growth can be indeterminate for a wide range of elasticities of intertemporal substitution in consumption. Such a range is bounded from below by a value undergoing a saddle node bifurcation and from above by a value giving raise to a flip bifurcation. It follows that both multiple stationary rates of growth and cycles may emerge. In addition, we carry out a welfare analysis in terms of the optimal level of taxation, since public spending affects consumer utility, although in a separable way.
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  • Bosi, Stefano & Magris, Francesco, 2005. "Fiscal policy and fluctuations in a monetary model of growth," Research in Economics, Elsevier, vol. 59(2), pages 110-118, June.
    • Handle: RePEc:eee:reecon:v:59:y:2005:i:2:p:110-118
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