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Fiscal policy rules in an overlapping generations model with endogenous labour supply

  • Ganelli, Giovanni

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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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 31 (2007)
Issue (Month): 3 (March)
Pages: 1015-1036

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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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  1. Rankin, N. & Scalera, D., 1991. "Death and the Keynesian Multiplier," The Warwick Economics Research Paper Series (TWERPS) 376, University of Warwick, Department of Economics.
  2. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
  3. Ben J. Heijdra & Johanna Elisabeth Ligthart, 1998. "The Dynamic Macroeconomic Effects of Tax Policy in an Overlapping Generations Model," IMF Working Papers 98/182, International Monetary Fund.
  4. repec:ner:tilbur:urn:nbn:nl:ui:12-141315 is not listed on IDEAS
  5. Rankin, N. & Roffia, B., 1999. "Maximum Sustainable Government Debt in the Overlapping Generations Model," The Warwick Economics Research Paper Series (TWERPS) 521, University of Warwick, Department of Economics.
  6. Obstfeld, Maurice & Rogoff, Kenneth S., 1995. "Exchange Rate Dynamics Redux," Scholarly Articles 12491026, Harvard University Department of Economics.
  7. Mitchell, Peter R. & Sault, Joanne E. & Wallis, Kenneth F., 2000. "Fiscal policy rules in macroeconomic models: principles and practice," Economic Modelling, Elsevier, vol. 17(2), pages 171-193, April.
  8. Leith, Campbell & Wren-Lewis, Simon, 2000. "Interactions between Monetary and Fiscal Policy Rules," Economic Journal, Royal Economic Society, vol. 110(462), pages C93-108, March.
  9. Christ, Carl F, 1979. "On Fiscal and Monetary Policies and the Government Budget Restraint," American Economic Review, American Economic Association, vol. 69(4), pages 526-38, September.
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