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Indeterminacy and Stabilization of Endogenous Cycles with Balanced-Budget Distortionary Taxation

  • Erkki Koskela
  • Mikko Puhakka
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    We study the effects of distortionary labor taxation on endogenous cycles and the indeterminacy of equilibria in an overlapping-generations model with a balanced-budget rule. Under proportional taxation there is a critical tax rate above which cycles vanish, while with linearly progressive taxation there is a critical level of tax exemption below which cycles also vanish. If the utility function is quasilinear, increasing the tax rate can cause the economy to become determinate both with proportional and with linearly progressive taxation, whereas a sufficiently high tax exemption can make equilibrium indeterminate if the utility function is more general.

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    Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

    Volume (Year): 62 (2006)
    Issue (Month): 2 (June)
    Pages: 149-167

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    Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200606)62:2_149:iasoec_2.0.tx_2-o
    DOI: 10.1628/001522106X120631
    Contact details of provider: Web page: https://www.mohr.de/fa

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    1. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, vol. 53(5), pages 995-1045, September.
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    6. Marta Aloi & Teresa Lloyd-Braga & Hans Jørgen Whitta-Jacobsen, 2002. "Endogenous Business Cycles and Systematic Stabilization Policy," EPRU Working Paper Series 02-03, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    7. Costas Azariadis & Roger Guesnerie, 1986. "Sunspots and Cycles," Review of Economic Studies, Oxford University Press, vol. 53(5), pages 725-737.
    8. Guo, Jang-Ting, 1999. "Multiple equilibria and progressive taxation of labor income," Economics Letters, Elsevier, vol. 65(1), pages 97-103, October.
    9. Guo, Jang-Ting & Harrison, Sharon G., 2004. "Balanced-budget rules and macroeconomic (in)stability," Journal of Economic Theory, Elsevier, vol. 119(2), pages 357-363, December.
    10. Diamond, Peter A & Yaari, Menahem, 1972. "Implications of the Theory of Rationing for Consumer Choice Under Uncertainty," American Economic Review, American Economic Association, vol. 62(3), pages 333-43, June.
    11. Cass, David & Okuno, Masahiro & Zilcha, Itzhak., . "The Role of Money in Supporting the Pareto Optimality of Competitive Equilibrium in Consumption-Loan Type Models," Working Papers 242, California Institute of Technology, Division of the Humanities and Social Sciences.
    12. Jang-Ting Guo & Sharon G. Harrison, 2001. "Tax Policy and Stability in a Model with Sector-Specific Externalities," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(1), pages 75-89, January.
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