Consolidated-Budget Rules and Macroeconomic Stability with Income-Tax and Finance Constraints
AbstractIn some Business-Cycle models a fiscal policy that sets income taxes counter cyclically can cause macroeconomic instability by giving rise to multiple equilibria and as a result to fluctuations caused by self fulfilling expectations. This paper shows that consolidated budget rules with endogenous income-tax rates can be stabilizing if they exhibit monetary dominance, where monetary policy manages expectations by implementing an active interest rate rule. This result is robust for plausible degrees of externalities in production. The size of the government, however, plays a key role in the degree of activeness that the monetary authority should exhibit in order to stabilize the economy. If government spending are not too large relative to private consumption, a neutral monetary policy [such that the real rate of interest is constant in and oﬀ the steady state] is also stabilizing
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Bibliographic InfoPaper provided by University of Haifa, Department of Economics in its series Working Papers with number WP2010/1.
Date of creation:
Date of revision: 01 May 2010
Fiscal Policy; Capital-Income Tax; Monetary Policy; Macroeconomic Stabilization; Finance Constraint; Arbitrage Channel; Investment-Based Channel; Consumption-Based Channel;
Other versions of this item:
- Gliksberg, Baruch, 2010. "Consolidated-Budget Rules and Macroeconomic Stability with Income-Tax and Finance Constraints," MPRA Paper 24817, University Library of Munich, Germany.
- E0 - Macroeconomics and Monetary Economics - - General
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
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