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Progressive Taxation and Macroeconomic (In)stability with Utility-Generating Government Spending

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  • Jang-Ting Guo

    ()
    (Department of Economics, University of California Riverside)

  • Shu-Hua Chen

    (National Taipei University)

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    Abstract

    We examine the theoretical interrelations between progressive income taxation and macroeconomic (in)stability in an otherwise standard one-sector real business cycle model with utility-generating government purchases of goods and services. When private and public consumption expenditures are complements in the household utility and the tax schedule is progressive, we analytically show that the economy exhibits indeterminacy and sunspots if and only if the degree of government-spending preference externality is higher than a critical threshold. Unlike traditional Keynesian-type stabilization policies, raising the tax progressivity may destabilize this version of our model by generating endogenous cyclical áuctuations. Moreover, the economy always displays saddle-path stability and equilibrium uniqueness under utility substitutability between private and public consumptions and progressive taxation.

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    File URL: http://economics.ucr.edu/repec/ucr/wpaper/13-02.pdf
    File Function: First version, 2013
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    Bibliographic Info

    Paper provided by University of California at Riverside, Department of Economics in its series Working Papers with number 201302.

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    Date of creation: Apr 2013
    Date of revision: Apr 2013
    Handle: RePEc:ucr:wpaper:201302

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    Keywords: Progressive Income Taxation; Equilibrium (In)determinacy; Utility-Generating.;

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    1. Campbell, John Y. & Mankiw, N. Gregory, 1990. "Permanent Income, Current Income, and Consumption," Scholarly Articles 3353762, Harvard University Department of Economics.
    2. Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
    3. Alfred Greiner, 2006. "Progressive Taxation, Public Capital, and Endogenous Growth," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 62(3), pages 353-366, September.
    4. Lawrence J. Christiano & Sharon G. Harrison, 1996. "Chaos, Sunspots, and Automatic Stabilizers," NBER Working Papers 5703, National Bureau of Economic Research, Inc.
    5. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
    6. Yunfang Hu & Ryoji Ohdoi & Koji Shimomura, 2004. "Indeterminacy in a Two-sector Endogenous Growth Model with Productive Government Spending," Discussion Paper Series 149, Research Institute for Economics & Business Administration, Kobe University.
    7. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
    8. Bean, Charles R, 1986. "The Estimation of "Surprise" Models and the "Surprise" Consumption Function," Review of Economic Studies, Wiley Blackwell, vol. 53(4), pages 497-516, August.
    9. Cazzavillan, Guido, 1996. "Public Spending, Endogenous Growth, and Endogenous Fluctuations," Journal of Economic Theory, Elsevier, vol. 71(2), pages 394-415, November.
    10. Ni, Shawn, 1995. "An empirical analysis on the substitutability between private consumption and government purchases," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 593-605, December.
    11. Chen, Been-Lon, 2006. "Public capital, endogenous growth, and endogenous fluctuations," Journal of Macroeconomics, Elsevier, vol. 28(4), pages 768-774, December.
    12. Sergey Slobodyan, 2004. "One Sector Models, Indeterminacy, and Productive Public Spending," Computing in Economics and Finance 2004 314, Society for Computational Economics.
    13. Turnovsky, Stephen J., 1997. "Fiscal Policy In A Growing Economy With Public Capital," Macroeconomic Dynamics, Cambridge University Press, vol. 1(03), pages 615-639, September.
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