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Dynamic effects of government expenditure in a finance constrained economy: A Note

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  • Chen, Yan
  • Zhang, Yan
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Abstract

Gokan [Dynamic effects of government expenditure in a finance constrained economy, J. Econ. Theory 127 (2006) 323-333] introduces constant government expenditure (financed by labor income taxes) in Woodford's model with capital-labor substitution and investigates how local dynamics near two steady states depend upon the elasticity of substitution between capital and labor. In this paper, we show that the local dynamics will change dramatically if the government transfers its revenue to the households (workers) in a lump sum way. In particular, we question the result that the rate of money growth has no impact on the model dynamics. In a numerical example, we illustrate that the result previously obtained is not robust to the alternative assumption.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 15138.

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Date of creation: 09 May 2009
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Handle: RePEc:pra:mprapa:15138

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Keywords: a lump sum transfer; indeterminacy.;

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  1. 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.).
  2. Woodford, Michael, 1986. "Stationary sunspot equilibria in a finance constrained economy," Journal of Economic Theory, Elsevier, Elsevier, vol. 40(1), pages 128-137, October.
  3. Grandmont, Jean-Michel & Pintus, Patrick & de Vilder, Robin, 1998. "Capital-Labor Substitution and Competitive Nonlinear Endogenous Business Cycles," Journal of Economic Theory, Elsevier, Elsevier, vol. 80(1), pages 14-59, May.
  4. Gokan, Yoichi, 2006. "Dynamic effects of government expenditure in a finance constrained economy," Journal of Economic Theory, Elsevier, Elsevier, vol. 127(1), pages 323-333, March.
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