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Chaos, sunspots, and automatic stabilizers

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Author Info
Lawrence J. Christiano
Sharon G. Harrison

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Abstract

We study a one-sector growth model which is standard except for the presence of an externality in the production function. The set of competitive equilibria is large. It includes constant equilibria, sunspot equilibria, cyclical and chaotic equilibria, and equilibria with deterministic or stochastic regime switching. The efficient allocation is characterized by constant employment and a constant growth rate. We identify an income tax-subsidy schedule that supports the efficient allocation as the unique equilibrium outcome. That schedule has two properties: (i) it specifies the tax rate to be an increasing function of aggregate employment, and (ii) earnings are subsidized when aggregate employment is at its efficient level. The first feature eliminates inefficient, fluctuating equilibria, while the second induces agents to internalize the externality.

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Publisher Info
Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series, Macroeconomic Issues with number WP-96-16.

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Date of creation: 1996
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Handle: RePEc:fip:fedhma:wp-96-16

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Keywords: Chaotic behavior in systems ; Taxation ; Economic stabilization;

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References listed on IDEAS
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  35. Gali, Jordi, 1994. "Monopolistic competition, endogenous markups, and growth," European Economic Review, Elsevier, vol. 38(3-4), pages 748-756, April. [Downloadable!] (restricted)
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  61. Dale T. Mortensen, 1988. "The Persistence and Indeterminacy of Unemployment in Search Equilibrium," Discussion Papers 810, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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