Externalities, income taxes and indeterminacy in OLG models
AbstractUsing an aggregate two-periods overlapping generations model with endogenous labor, consumption in both periods of life, homothetic preferences and productive external effects [Lloyd-Braga et al., 2007. Indeterminacy in dynamic models: When Diamond meets Ramsey. Journal of Economic Theory 134, 513-536], we examine the effects of alternative government financing methods on the range of values of increasing returns leading to indeterminacy. We show that under a large enough share of first period consumption over the wage income, local indeterminacy can easily occur for mild externalities if constant government expenditure is financed through either labor or capital income taxes. More precisely, we show that, with labor income taxes and mild externalities, small government expenditures are helpful to local indeterminacy, while large government expenditures are useful to stabilize the economy. With capital income taxes and mild externalities, local indeterminacy always exists. Moreover, we explore how our previous results are changed once government expenditure is endogenously determined for fixed rates on labor and capital income under the balanced-budget rule.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 22370.
Date of creation: 28 Apr 2010
Date of revision:
Indeterminacy; Endogenous income tax rates; Externalities.;
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- C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
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