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Income effects, stabilization policy, and indeterminacy in one-sector models

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  • Yan Zhang

    (Wenlan School of Business, Zhongnan University of Economics and Law)

Abstract

The interrelations between indeterminacy and progressive income tax rules are discussed in a one-sector real business cycle model with capacity utilization, productive increasing returns, and the Jaimovich-Rebelo preferences that exhibit varying degrees of income effect. When the values of income effect are large and the other parameter values are plausible, a moderately progressive income tax schedule can destabilize the economy by generating local indeterminacy. Moreover, numerical examples show that when an income tax schedule with a progressivity feature destabilizes the economy, the degree of income effect and the minimum level of increasing returns required for local indeterminacy are negatively related. These results are in contrast to those obtained in Guo and Lansing (1998), in which a progressive tax schedule can stabilize the one-sector economy with increasing returns.

Suggested Citation

  • Yan Zhang, 2021. "Income effects, stabilization policy, and indeterminacy in one-sector models," Annals of Economics and Finance, Society for AEF, vol. 22(1), pages 109-133, May.
  • Handle: RePEc:cuf:journl:y:2021:v:22:i:1:zhang
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    More about this item

    Keywords

    Progressive income tax schedules; Income effects; Local indeterminacy;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • 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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