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Alternative government financing and aggregate fluctuations driven by self-fulfilling expectations

  • Gokan, Yoichi
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    Using Woodford's finance-constrained model [Woodford, M., 1986. Stationary sunspot equilibria in a finance constrained economy. Journal of Economic Theory 40, 128-137] with external effects in production as in Barinci and Cheron [2001. Sunspots and business cycle in a finance constrained economy. Journal of Economic Theory 97, 30-49], this paper investigates the effects of alternative government financing methods on the range of values of increasing returns leading to an indeterminate steady state. It will be shown that indeterminacy may easily arise at a wide range of values of increasing returns if constant government expenditure is financed through labor income taxes, and with difficulty if constant government expenditure is financed by taxes on capital. In addition, we explore how the consequences of endogenous income taxes are changed if tax rates on labor and capital income are kept constant and government expenditure is endogenously adjusted to satisfy the budget constraint.

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

    Volume (Year): 32 (2008)
    Issue (Month): 5 (May)
    Pages: 1650-1679

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    Handle: RePEc:eee:dyncon:v:32:y:2008:i:5:p:1650-1679
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    1. van der Ploeg, Frederick & Alogoskoufis, George S, 1994. "Money and Endogenous Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(4), pages 771-91, November.
    2. Weder, Mark, 2001. "Indeterminacy in a Small Open Economy Ramsey Growth Model," Journal of Economic Theory, Elsevier, vol. 98(2), pages 339-356, June.
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    4. GRANDMONT, Jean-Michel & PINTUS, Patrick & de VILDER, Robin, 1997. "Capital-labor substitution and competitive nonlinear endogenous business cycles," CORE Discussion Papers 1997087, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. Turnovsky, Stephen J, 1992. "Alternative Forms of Government Expenditure Financing: A Comparative Welfare Analysis," Economica, London School of Economics and Political Science, vol. 59(234), pages 235-52, May.
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    8. Schmitt-Grohe, Stephanie & Uribe, Martin, 1997. "Balanced-Budget Rules, Distortionary Taxes, and Aggregate Instability," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 976-1000, October.
    9. Bennett, Rosalind L. & Farmer, Roger E. A., 2000. "Indeterminacy with Non-separable Utility," Journal of Economic Theory, Elsevier, vol. 93(1), pages 118-143, July.
    10. P. Diamond, 1980. "Aggregate Demand Management in Search Equilibrium," Working papers 268, Massachusetts Institute of Technology (MIT), Department of Economics.
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    15. Gokan, Yoichi, 2002. "Alternative government financing and stochastic endogenous growth," Journal of Economic Dynamics and Control, Elsevier, vol. 26(4), pages 681-706, April.
    16. Wen, Yi, 1998. "Capacity Utilization under Increasing Returns to Scale," Journal of Economic Theory, Elsevier, vol. 81(1), pages 7-36, July.
    17. Pintus, Patrick & Sands, Duncan & de Vilder, Robin, 2000. "On the transition from local regular to global irregular fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 24(2), pages 247-272, February.
    18. de Vilder, Robin, 1996. "Complicated Endogenous Business Cycles under Gross Substitutability," Journal of Economic Theory, Elsevier, vol. 71(2), pages 416-442, November.
    19. Gokan, Yoichi, 2003. "The speed of convergence and alternative government financing," Journal of Economic Dynamics and Control, Elsevier, vol. 27(9), pages 1517-1531, July.
    20. Basu, Susanto & Fernald, John G, 1997. "Returns to Scale in U.S. Production: Estimates and Implications," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 249-83, April.
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