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Equilibrium dynamics under lump-sum taxation in an exchange economy with skewed endowments

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  • Mikko Puhakka

    (Bank of Finland)

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    Abstract

    I explore the dynamics in overlapping generations models with pure exchange and lump-sum taxes, when the second period after tax endowment is negative, and contrast the characteristics of equilibria to those of models with positive after tax endowments. In particular, if the intertemporal elasticity of substitution is less than unity, there can be only a two cycle or stable (ie indeterminate) equilibria for certain parameter values. With this value for that elasticity chaos and a cycle of any order can occur in a model with regular endowments. In a sense the lump-sum taxation in this model operates as a stabilizing device. The precise stability condition holds with a small discount factor and in economies with relatively high taxes in the first period. If the intertemporal elasticity of substitution is greater than unity, the steady state equilibria are unstable, and thus determinate, as is the case with the regular model.

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    File URL: http://128.118.178.162/eps/mac/papers/0508/0508033.pdf
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    Bibliographic Info

    Paper provided by EconWPA in its series Macroeconomics with number 0508033.

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    Length: 25 pages
    Date of creation: 31 Aug 2005
    Date of revision:
    Handle: RePEc:wpa:wuwpma:0508033

    Note: Type of Document - pdf; pages: 25. Bank of Finland Discussion Papers 29/2004
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    Web page: http://128.118.178.162

    Related research

    Keywords: overlapping generations economy; saving; cycles; lump-sum taxation;

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    1. Paloviita , Maritta & Mayes , David, 2004. "The use of real time information in Phillips curve relationships for the euro area," Research Discussion Papers 16/2004, Bank of Finland.
    2. Kauppi , Heikki & Koskela , Erkki & Stenbacka , Rune, 2004. "Equilibrium unemployment and investment under product and labour market imperfections," Research Discussion Papers 11/2004, Bank of Finland.
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    7. Paloviita , Maritta, 2002. "Inflation dynamics in the euro area and the role of expectations," Research Discussion Papers 20/2002, Bank of Finland.
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    12. Mayes , David G., 2004. "An approach to bank insolvency in transition and emerging economies," Research Discussion Papers 4/2004, Bank of Finland.
    13. Schaling , Eric & Eijffinger , Sylvester & Tesfaselassie , Mewael, 2004. "Heterogeneous information about the term structure, least-squares learning and optimal rules for inflation targeting," Research Discussion Papers 23/2004, Bank of Finland.
    14. Mayes , David G. & Virén , Matti, 2004. "Asymmetries in the Euro area economy," Research Discussion Papers 9/2004, Bank of Finland.
    15. Jokivuolle , Esa & Lanne , Markku, 2004. "Trading Nokia: The roles of the Helsinki vs the New York stock exchanges," Research Discussion Papers 26/2004, Bank of Finland.
    16. Rautureau, Nicolas, 2004. "Measuring the long-term perception of monetary policy and the term structure," Research Discussion Papers 12/2004, Bank of Finland.
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