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Destabilizing Balanced-Budget Consumption Taxes in Multi-Sector Economies

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  • Kazuo Nishimura

    ()
    (Institute of Economic Research, Kyoto University)

  • Carine Nourry

    ()
    (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & Institut Universitaire de France)

  • Thomas Seegmuller

    ()
    (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM & EHESS)

  • Alain Venditti

    ()
    (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & EDHEC)

Abstract

We examine the impact of balanced-budget consumption taxes on the existence of expectations-driven business cycles in two-sector economies with infinitely-lived households. We prove that, whatever the relative capital intensity difference across sectors, aggregate instability can occur if the consumption tax rate is not too low. Moreover, we show through a numerical exercise based on empirically plausible tax rates that endogenous business-cycle fluctuations may be a source of instability for all OECD countries, including the US.

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Bibliographic Info

Paper provided by Aix-Marseille School of Economics, Marseille, France in its series AMSE Working Papers with number 1312.

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Length: 17 pages
Date of creation: Mar 2013
Date of revision: Sep 2012
Handle: RePEc:aim:wpaimx:1312

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Web page: http://www.amse-aixmarseille.fr/en
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Keywords: Aggregate instability; indeterminacy; expectations-driven fluctuations; consumption taxes; balanced-budget rule; infinite-horizon two-sector model.;

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  1. Narayana R. Kocherlakota, 1996. "The Equity Premium: It's Still a Puzzle," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 34(1), pages 42-71, March.
  2. Nourry, Carine & Seegmuller, Thomas & Venditti, Alain, 2013. "Aggregate instability under balanced-budget consumption taxes: A re-examination," Journal of Economic Theory, Elsevier, Elsevier, vol. 148(5), pages 1977-2006.
  3. Aurélien W. Saïdi, 2011. "Balanced‐budget rule, distortionary taxes and aggregate stability," International Journal of Economic Theory, The International Society for Economic Theory, The International Society for Economic Theory, vol. 7(3), pages 293-300, 09.
  4. Chryssi Giannitsarou, 2007. "Balanced Budget Rules and Aggregate Instability: The Role of Consumption Taxes," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 117(523), pages 1423-1435, October.
  5. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 110(4), pages 825-853, August.
  6. Benhabib, Jess & Nishimura, Kazuo, 1996. "Indeterminancy and Sunspots with Constant Returns," Working Papers, C.V. Starr Center for Applied Economics, New York University 96-44, C.V. Starr Center for Applied Economics, New York University.
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  8. Eric W. Bond & Kazumichi Iwasa & Kazuo Nishimura, 2012. "The dynamic Heckscher–Ohlin model: A diagrammatic analysis," International Journal of Economic Theory, The International Society for Economic Theory, The International Society for Economic Theory, vol. 8(2), pages 197-211, 06.
  9. Stephanie Schmitt-Grohe & Martin Uribe, 1995. "Balanced-budget rules, distortionary taxes, and aggregate instability," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 95-44, Board of Governors of the Federal Reserve System (U.S.).
  10. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," NBER Working Papers 8896, National Bureau of Economic Research, Inc.
  11. Nishimura, Kazuo & Venditti, Alain, 2010. "Indeterminacy and expectation-driven fluctuations with non-separable preferences," Mathematical Social Sciences, Elsevier, Elsevier, vol. 60(1), pages 46-56, July.
  12. Takahashi, Harutaka & Mashiyama, Koichi & Sakagami, Tomoya, 2012. "Does The Capital Intensity Matter? Evidence From The Postwar Japanese Economy And Other Oecd Countries," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 16(S1), pages 103-116, April.
  13. Lane, Philip R., 2003. "The cyclical behaviour of fiscal policy: evidence from the OECD," Journal of Public Economics, Elsevier, Elsevier, vol. 87(12), pages 2661-2675, December.
  14. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, American Economic Association, vol. 78(3), pages 402-17, June.
  15. Nishimura, Kazuo, 1985. "Competitive equilibrium cycles," Journal of Economic Theory, Elsevier, Elsevier, vol. 35(2), pages 284-306, August.
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  18. Baxter, Marianne, 1996. "Are Consumer Durables Important for Business Cycles?," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 147-55, February.
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