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Sectoral Composition of Government Spending and Macroeconomic (In)stability

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  • Jang-Ting Guo

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

  • Juin-Jen Chang

    ()
    (Academia Sinica)

  • Jhy-Yuan Shieh

    ()
    (Soochow University)

  • Wei-Neng Wang

    ()
    (Soochow University)

Abstract

This paper examines the quantitative interrelations between sectoral composition of public spending and equilibrium (in)determinacy in a two-sector real business cycle model with positive productive externalities in investment. When government purchases of con- sumption and investment goods are set as constant fractions of their respective sectoral output, we show that the public-consumption share plays no role in the modeliÌs local dynamics, and that a su¢ ciently high public-investment share can stabilize the economy against endogenous belief-driven cyclical aÌuctuations. When each type of government spending is postulated as a constant proportion of the economyiÌs total output, we Önd that there exists a trade-o§ between public consumption versus investment expenditures to yield saddle-path stability and equilibrium uniqueness.

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File URL: http://economics.ucr.edu/repec/ucr/wpaper/13-05.pdf
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Bibliographic Info

Paper provided by University of California at Riverside, Department of Economics in its series Working Papers with number 201305.

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Date of creation: Sep 2013
Date of revision: Sep 2013
Handle: RePEc:ucr:wpaper:201305

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Keywords: Government Spending; Equilibrium (In)determinacy; Business Cycles;

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  1. Giannitsarou, Chryssi, 2006. "Balanced Budget Rules and Aggregate Instability: The Role of Consumption Taxes," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5531, C.E.P.R. Discussion Papers.
  2. Nir Jaimovich & Sergio Rebelo, 2006. "Can News About the Future Drive the Business Cycle?," NBER Working Papers 12537, National Bureau of Economic Research, Inc.
  3. Teresa Lloyd-Braga & Leonor Modesto & Thomas Seegmuller, 2008. "Tax Rate Variability and Public Spending as Sources of Indeterminacy," Journal of Public Economic Theory, Association for Public Economic Theory, Association for Public Economic Theory, vol. 10(3), pages 399-421, 06.
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  5. Harrison, Sharon G., 2001. "Indeterminacy in a model with sector-specific externalities," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 25(5), pages 747-764, May.
  6. Barro, Robert J., 1990. "Government Spending in a Simple Model of Endogeneous Growth," Scholarly Articles 3451296, Harvard University Department of Economics.
  7. Kazuo Mino & Yasuhiro Nakamoto, 2008. "Progressive Taxation, Wealth Distribution, and Macroeconomic Stability," Discussion Papers in Economics and Business, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) 08-22, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  8. Sharon Harrison & Jang-Ting Guo, 2008. "Indeterminacy with No-Income-Effect Preferences and Sector-Specifc Externalities," Working Papers, Barnard College, Department of Economics 0801, Barnard College, Department of Economics.
  9. Dressler, Scott, 2008. "Economies of scale in banking, indeterminacy, and monetary policy," MPRA Paper 8370, University Library of Munich, Germany.
  10. Christiano, Lawrence J. & G. Harrison, Sharon, 1999. "Chaos, sunspots and automatic stabilizers," Journal of Monetary Economics, Elsevier, Elsevier, vol. 44(1), pages 3-31, August.
  11. Jang-Ting Guo & Shu-Hua Chen, 2010. "Progressive Taxation and Macroeconomic (In)stability with Productive Government Spending," Working Papers 201006, University of California at Riverside, Department of Economics, revised Aug 2010.
  12. Gokan Yoichi, 2013. "Income taxes and endogenous fluctuations: a generalization," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, De Gruyter, vol. 17(4), pages 461-482, September.
  13. Dromel, Nicolas L. & Pintus, Patrick A., 2007. "Linearly progressive income taxes and stabilization," Research in Economics, Elsevier, Elsevier, vol. 61(1), pages 25-29, March.
  14. Stephanie Schmitt-Grohe & Martin Uribe, 1995. "Balanced-budget rules, distortionary taxes, and aggregate instability," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 95-44, Board of Governors of the Federal Reserve System (U.S.).
  15. Gokan, Yoichi, 2006. "Dynamic effects of government expenditure in a finance constrained economy," Journal of Economic Theory, Elsevier, Elsevier, vol. 127(1), pages 323-333, March.
  16. Jess Benhabib & Roger E.A. Farmer, 1992. "Indeterminacy and Increasing Returns," UCLA Economics Working Papers, UCLA Department of Economics 646, UCLA Department of Economics.
  17. Nicolas L. Dromel & Patrick A. Pintus, 2008. "Are Progressive Income Taxes Stabilizing?," Journal of Public Economic Theory, Association for Public Economic Theory, Association for Public Economic Theory, vol. 10(3), pages 329-349, 06.
  18. Sharon G. Harrison, 2003. "Returns to Scale and Externalities in the Consumption and Investment Sectors," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 963-976, October.
  19. ShuHua Chen & JangTing Guo, 2013. "On indeterminacy and growth under progressive taxation and productive government spending," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 46(3), pages 865-880, August.
  20. Nourry, Carine & Seegmuller, Thomas & Venditti, Alain, 2013. "Aggregate instability under balanced-budget consumption taxes: A re-examination," Journal of Economic Theory, Elsevier, Elsevier, vol. 148(5), pages 1977-2006.
  21. Xavier Raurich, 2001. "Indeterminancy and Government Spending in a Two-Sector Model of Endogenous Growth," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(1), pages 210-229, January.
  22. Guo, Jang-Ting & Lansing, Kevin J., 1998. "Indeterminacy and Stabilization Policy," Journal of Economic Theory, Elsevier, Elsevier, vol. 82(2), pages 481-490, October.
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