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One Sector Models, Indeterminacy, and Productive Public Spending

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  • Sergey Slobodyan

Abstract

This paper studies the influence of different modelling assumptions on the stability of the steady state in one--sector models of economic growth with externalities in the production function. We start with a standard Benhabib&Farmer 1994 one--sector model and study the combined effect on the stability of variable capital utilization, progressive taxation, and productive public spending subject to congestion. As was shown earlier by Wen 1998, variable capacity utilization leads to indeterminacy or absolute instability for low degrees of social increasing returns to scale. Introduction of productive public spending further lowers the degree of IRS necessary to break saddle--path stability of the steady state. The degree of progressivity of the tax schedule influences only the indeterminate and absolute unstable regions in the space spanned by externality parameters. More progressive tax schedule increases the area of indeterminacy at the expense of the absolute instablity region. We perform calibration of the model to the tax regimes observed in the USA

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 314.

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Date of creation: 11 Aug 2004
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Handle: RePEc:sce:scecf4:314

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Keywords: indeterminacy; absolute instability; productive public spending; progressive taxation;

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  1. Robert J. Barro & Xavier Sala-i-Martin, 1990. "Public Finance in Models of Economic Growth," NBER Working Papers 3362, National Bureau of Economic Research, Inc.
  2. Susanto Basu & John G. Fernald, 1996. "Returns to scale in U.S. production: estimates and implications," International Finance Discussion Papers 546, Board of Governors of the Federal Reserve System (U.S.).
  3. Slobodyan, Sergey, 2005. "Indeterminacy, sunspots, and development traps," Journal of Economic Dynamics and Control, Elsevier, vol. 29(1-2), pages 159-185, January.
  4. Benhabib, J. & Farmer, R.E.A, 1991. "Indeterminacy and Increasing Returns," Papers 165, Cambridge - Risk, Information & Quantity Signals.
  5. Wen, Yi, 1998. "Capacity Utilization under Increasing Returns to Scale," Journal of Economic Theory, Elsevier, vol. 81(1), pages 7-36, July.
  6. Cazzavillan, Guido, 1996. "Public Spending, Endogenous Growth, and Endogenous Fluctuations," Journal of Economic Theory, Elsevier, vol. 71(2), pages 394-415, November.
  7. McDonald, James B & Ransom, Michael R, 1979. "Functional Forms, Estimation Techniques and the Distribution of Income," Econometrica, Econometric Society, vol. 47(6), pages 1513-25, November.
  8. Guo, Jang-Ting, 1999. "Multiple equilibria and progressive taxation of labor income," Economics Letters, Elsevier, vol. 65(1), pages 97-103, October.
  9. Laitner, John & Stolyarov, Dmitriy, 2004. "Aggregate returns to scale and embodied technical change: theory and measurement using stock market data," Journal of Monetary Economics, Elsevier, vol. 51(1), pages 191-233, January.
  10. Juan C. Ferrero, 2003. "The statistical distribution of money and the rate of money transference," Papers cond-mat/0306322, arXiv.org.
  11. Jang-Ting Guo & Sharon G. Harrison, 2001. "Tax Policy and Stability in a Model with Sector-Specific Externalities," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(1), pages 75-89, January.
  12. Schmitt-Grohe, Stephanie & Uribe, Martin, 1997. "Balanced-Budget Rules, Distortionary Taxes, and Aggregate Instability," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 976-1000, October.
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Cited by:
  1. Jang-Ting Guo & Shu-Hua Chen, 2013. "Progressive Taxation and Macroeconomic (In)stability with Utility-Generating Government Spending," Working Papers 201302, University of California at Riverside, Department of Economics, revised Apr 2013.

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