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Fiscal Policy Rules in an Overlapping Generations Model with Endogenous Labour Supply

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  • Giovanni Ganelli

Abstract

A fiscal policy rule in which taxation is a function of existing government debt (a "wealth-tax") is usually believed to be effective in providing stability. Using a dicrete-time version of Blanchard's overlapping generations model, extended to include money and an endogenous labour supply we show that, contrary to the intuition, a wealth tax might not be enough to ensure the existence of a unique, well defined, saddle-path equilibrium. We suggest that a government willing to run a positive and sustainable level of debt could use an alternative financing rule, imposing an additional tax component, that is a function of the difference between the real interest rate and the tax rate on wealth.

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Paper provided by Trinity College Dublin, Department of Economics in its series Trinity Economics Papers with number 200215.

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Date of creation: 2002
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Handle: RePEc:tcd:tcduee:200215

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  1. Rankin, Neil & Scalera, Domenico, 1995. "Death and the Keynesian multiplier," Ricerche Economiche, Elsevier, vol. 49(1), pages 75-87, March.
  2. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-60, June.
  3. Leith, Campbell & Wren-Lewis, Simon, 2000. "Interactions between Monetary and Fiscal Policy Rules," Economic Journal, Royal Economic Society, vol. 110(462), pages C93-108, March.
  4. Johanna Elisabeth Ligthart & Ben J. Heijdra, 1998. "The Dynamic Macroeconomic Effects of Tax Policy in an Overlapping Generations Model," IMF Working Papers 98/182, International Monetary Fund.
  5. Mitchell, Peter R. & Sault, Joanne E. & Wallis, Kenneth F., 2000. "Fiscal policy rules in macroeconomic models: principles and practice," Economic Modelling, Elsevier, vol. 17(2), pages 171-193, April.
  6. Christ, Carl F, 1979. "On Fiscal and Monetary Policies and the Government Budget Restraint," American Economic Review, American Economic Association, vol. 69(4), pages 526-38, September.
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Cited by:
  1. Hiebert, Paul & Pérez, Javier J. & Rostagno, Massimo, 2009. "The trade-off between public debt reduction and automatic stabilisation," Economic Modelling, Elsevier, vol. 26(2), pages 464-472, March.
  2. Futagami, Koichi & Shibata, Akihisa, 2003. "Budget Deficits and Economic Growth," Discussion Paper 133, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
  3. Barbara Annicchiarico, 2003. "Government deficits, wealth effects and the price level in an optimizing model," Working Paper Series 285, European Central Bank.

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