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Destabilizing balanced-budget consumption taxes in multi-sector economies

  • Kazuo Nishimura
  • Carine Nourry
  • Thomas Seegmuller
  • Alain Venditti

We examine the impact of balanced-budget consumption taxes on the existence of expectations-driven business cycles in two-sector economies with infinitely-lived households. We prove that, whatever the relative capital intensity difference across sectors, aggregate instability can occur if the consumption tax rate is not too low. Moreover, we show through a numerical exercise based on empirically plausible tax rates that endogenous business-cycle fluctuations may be a source of instability for all OECD countries, including the US.

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Article provided by The International Society for Economic Theory in its journal International Journal of Economic Theory.

Volume (Year): 9 (2013)
Issue (Month): 1 (03)
Pages: 113-130

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Handle: RePEc:bla:ijethy:v:9:y:2013:i:1:p:113-130
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