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Destabilizing balanced-budget consumption taxes in multi-sector economies

Listed author(s):
  • 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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File URL: http://hdl.handle.net/10.1111/10.1111/j.1742-7363.2013.12008.x
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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
DOI: 10.1111/j.1742-7363.2013.12008.x
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=1742-7355

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  1. Philip R. Lane, 2002. "The Cyclical Behaviour of Fiscal Policy: Evidence from the OECD," Trinity Economics Papers 20022, Trinity College Dublin, Department of Economics.
  2. Benhabib, Jess & Nishimura, Kazuo, 1983. "Competitive Equilibrium Cycles," Working Papers 83-30, C.V. Starr Center for Applied Economics, New York University.
  3. Takahashi, Harutaka & Mashiyama, Koichi & Sakagami, Tomoya, 2012. "Does The Capital Intensity Matter? Evidence From The Postwar Japanese Economy And Other Oecd Countries," Macroeconomic Dynamics, Cambridge University Press, vol. 16(S1), pages 103-116, April.
  4. Giannitsarou, Chryssi, 2006. "Balanced Budget Rules and Aggregate Instability: The Role of Consumption Taxes," CEPR Discussion Papers 5531, C.E.P.R. Discussion Papers.
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  11. Benhabib, Jess & Nishimura, Kazuo, 1996. "Indeterminancy and Sunspots with Constant Returns," Working Papers 96-44, C.V. Starr Center for Applied Economics, New York University.
  12. Kocherlakota, N., 1995. "The Equity Premium: It's Still a Puzzle," Working Papers 95-05, University of Iowa, Department of Economics.
  13. Jess Benhabib & Roger E.A. Farmer, 1992. "Indeterminacy and Increasing Returns," UCLA Economics Working Papers 646, UCLA Department of Economics.
  14. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 825-853, August.
  15. Aurélien W. Saïdi, 2011. "Balanced‐budget rule, distortionary taxes and aggregate stability," International Journal of Economic Theory, The International Society for Economic Theory, vol. 7(3), pages 293-300, 09.
  16. Stephanie Schmitt-Grohe & Martin Uribe, 1995. "Balanced-budget rules, distortionary taxes, and aggregate instability," Finance and Economics Discussion Series 95-44, Board of Governors of the Federal Reserve System (U.S.).
  17. Carine Nourry & Thomas Seegmuller & Alain Venditti, 2011. "Aggregate instability under balanced-budget consumption taxes: a re-examination," Working Papers halshs-00633609, HAL.
  18. Baxter, Marianne, 1996. "Are Consumer Durables Important for Business Cycles?," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 147-155, February.
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