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Balanced-Budget Rule, distortionary taxes and Aggregate Instability: A Comment

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Author Info
Aurélien Saidi
Abstract

It has been shown that under perfect competition and constant returns-to-scale, a one-sector growth model may exhibit local indeterminacy when income tax rates are endogenously determined by a balanced-budget rule while government expendi- tures are fixed. This paper shows that the associated aggregate instability does not ensue from the local indeterminacy of a specific stationary equilibrium but from the multiplicity of the stationary equilibria and persists under local determinacy of all of them. We provide a global analysis of the Schmitt-Grohe and Uribe model [1997] and study specific cases that were not investigated in the original paper, when aggregate instability is inherited from the coexistence of two saddle-path equilibria on one hand and from the connection of the two steady states on the other hand.

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Paper provided by University of Paris West - Nanterre la Défense, EconomiX in its series EconomiX Working Papers with number 2008-44.

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Length: 19 pages
Date of creation: 2008
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Handle: RePEc:drm:wpaper:2008-44

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Related research
Keywords: Balanced-budget rule; Increasing returns; Indeterminacy; Saddle-sink connection;

Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
O42 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models
O47 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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    Other versions:
  3. Basu, Susanto & Fernald, John G, 1997. "Returns to Scale in U.S. Production: Estimates and Implications," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 249-83, April.
    Other versions:
  4. Blanchard, Olivier J. & Summers, Lawrence H., 1987. "Fiscal increasing returns, hysteresis, real wages and unemployment," European Economic Review, Elsevier, vol. 31(3), pages 543-560, April. [Downloadable!] (restricted)
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  5. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1995. "Capital utilization and returns to scale," Working Paper Series, Macroeconomic Issues 95-5, Federal Reserve Bank of Chicago.
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  6. Hartl, Richard F., 1987. "A simple proof of the monotonicity of the state trajectories in autonomous control problems," Journal of Economic Theory, Elsevier, vol. 41(1), pages 211-215, February. [Downloadable!] (restricted)
  7. Enrique G. Mendoza & Assaf Razin & Linda L. Tesar, 1995. "Effective Tax Rates in Macroeconomics: Cross-Country Estimates of Tax Rates on Factor Incomes and Consumption," NBER Working Papers 4864, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Burnside, Craig, 1996. "Production function regressions, returns to scale, and externalities," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 177-201, April. [Downloadable!] (restricted)
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