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Equilibrium dynamics under lump-sum taxation in an exchange economy with skewed endowments

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  • Puhakka, Mikko

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    (Department of Economics, University of Oulu,)

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    Abstract

    I explore the dynamics in overlapping generations models with pure exchange and lump-sum taxes, when the second period after tax endowment is negative, and contrast the characteristics of equilibria to those of models with positive after tax endowments. In particular, if the intertemporal elasticity of substitution is less than unity, there can be only a two cycle or stable (ie indeterminate) equilibria for certain parameter values. With this value for that elasticity chaos and a cycle of any order can occur in a model with regular endowments. In a sense the lump-sum taxation in this model operates as a stabilizing device. The precise stability condition holds with a small discount factor and in economies with relatively high taxes in the first period. If the intertemporal elasticity of substitution is greater than unity, the steady state equilibria are unstable, and thus determinate, as is the case with the regular model.

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    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0429.pdf
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    Bibliographic Info

    Paper provided by Bank of Finland in its series Research Discussion Papers with number 29/2004.

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    Length: 25 pages
    Date of creation: 13 Oct 2004
    Date of revision:
    Handle: RePEc:hhs:bofrdp:2004_029

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    Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Web page: http://www.suomenpankki.fi/en/
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    Related research

    Keywords: overlapping generations economy; saving; cycles; lump-sum taxation;

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    1. de la Croix,David & Michel,Philippe, 2002. "A Theory of Economic Growth," Cambridge Books, Cambridge University Press, number 9780521001151, October.
    2. Gale, David, 1973. "Pure exchange equilibrium of dynamic economic models," Journal of Economic Theory, Elsevier, vol. 6(1), pages 12-36, February.
    3. Grandmont Jean-michel, 1983. "On endogenous competitive business cycles," CEPREMAP Working Papers (Couverture Orange) 8316, CEPREMAP.
    4. Cass, David & Okuno, Masahiro & Zilcha, Itzhak., . "The Role of Money in Supporting the Pareto Optimality of Competitive Equilibrium in Consumption-Loan Type Models," Working Papers 242, California Institute of Technology, Division of the Humanities and Social Sciences.
    5. Azariadis, Costas & Guesnerie, Roger, 1986. "Sunspots and Cycles," Review of Economic Studies, Wiley Blackwell, vol. 53(5), pages 725-37, October.
    6. Guesnerie, R. & Woodford, M., 1991. "Endogenous Fluctuations," DELTA Working Papers 91-10, DELTA (Ecole normale supérieure).
    7. Bhattacharya, Joydeep & Haslag, Joseph, 2001. "On the Use of the Inflation Tax when Non-Distortionary Taxes Are Available," Staff General Research Papers 5247, Iowa State University, Department of Economics.
    8. Balasko, Yves & Shell, Karl, 1981. "The overlapping-generations model. III. The case of log-linear utility functions," Journal of Economic Theory, Elsevier, vol. 24(1), pages 143-152, February.
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