Fiscal Policy Rules in an Overlapping Generations Model with Endogenous Labour Supply
AbstractA 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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Bibliographic InfoPaper provided by Trinity College Dublin, Department of Economics in its series Trinity Economics Papers with number 200215.
Date of creation: 2002
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Other versions of this item:
- Ganelli, Giovanni, 2007. "Fiscal policy rules in an overlapping generations model with endogenous labour supply," Journal of Economic Dynamics and Control, Elsevier, vol. 31(3), pages 1015-1036, March.
- NEP-ALL-2003-11-09 (All new papers)
- NEP-DGE-2003-11-09 (Dynamic General Equilibrium)
- NEP-MAC-2003-11-09 (Macroeconomics)
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