Fiscal policy rules in an overlapping generations model with endogenous labour supply
A fiscal policy rule in which taxation is a function of existing government debt (a "wealth-tax") is usually believed to be effective in providing stability. Using a dicrete-time version of Blanchard's overlapping generations model, extended to include money and an endogenous labour supply we show that, contrary to the intuition, a wealth tax might not be enough to ensure the existence of a unique, well defined, saddle-path equilibrium. We suggest that a government willing to run a positive and sustainable level of debt could use an alternative financing rule, imposing an additional tax component, that is a function of the difference between the real interest rate and the tax rate on wealth.
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Volume (Year): 31 (2007)
Issue (Month): 3 (March)
Pages: 1015-1036
| Handle: | RePEc:eee:dyncon:v:31:y:2007:i:3:p:1015-1036 |
| Contact details of provider: | Web page: http://www.elsevier.com/locate/jedc
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