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Balanced-Budget Rules and Macroeconomic Stability with Overlapping Generations

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  • Jang-Ting Guo

    (Department of Economics, University of California Riverside)

  • Yan Zhang

    (Zhongnan University of Economics and Law)

Abstract

In the context of a stylized two-period overlapping generations model, this paper examines the macroeconomic (in)stability effects of a balanced-budget rule whereby constant government spending is financed by endogenous taxation on agents' labor income or consumption expenditures. In sharp contrast to previous studies for a representative-agent framework, our baseline economy always exhibits local determinacy and equilibrium uniqueness, hence both labor and consumption taxes are stabilizing instruments against cyclical fluctuations driven by animal spirits. Moreover, this no-indeterminacy result and associated dynamic equivalence between endogenous labor versus consumption taxation remain qualitatively robust to various modifications in the household-preference or firm-production formulations.

Suggested Citation

  • Jang-Ting Guo & Yan Zhang, 2021. "Balanced-Budget Rules and Macroeconomic Stability with Overlapping Generations," Working Papers 202109, University of California at Riverside, Department of Economics.
    • Handle: RePEc:ucr:wpaper:202109
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    References listed on IDEAS

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    More about this item

    Keywords

    Balanced-Budget Rules; Indeterminacy; Overlapping Generations Model.;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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