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Destabilizing Balanced-Budget Consumption Taxes in Multi-Sector Economies

  • Kazuo Nishimura

    ()

    (Institute of Economic Research, Kyoto University)

  • Carine Nourry

    ()

    (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & Institut Universitaire de France)

  • Thomas Seegmuller

    ()

    (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM & EHESS)

  • Alain Venditti

    ()

    (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & EDHEC)

We examine the impact of balanced-budget consumption taxes on the existence of expectations-driven business cycles in two-sector economies with infinitely-lived households. We prove that, whatever the relative capital intensity difference across sectors, aggregate instability can occur if the consumption tax rate is not too low. Moreover, we show through a numerical exercise based on empirically plausible tax rates that endogenous business-cycle fluctuations may be a source of instability for all OECD countries, including the US.

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Paper provided by Aix-Marseille School of Economics, Marseille, France in its series AMSE Working Papers with number 1312.

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Length: 17 pages
Date of creation: Mar 2013
Date of revision: Sep 2012
Handle: RePEc:aim:wpaimx:1312
Contact details of provider: Web page: http://www.amse-aixmarseille.fr/en

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  1. Jess Benhabib & Roger E.A. Farmer, 1992. "Indeterminacy and Increasing Returns," UCLA Economics Working Papers 646, UCLA Department of Economics.
  2. Nishimura, Kazuo & Venditti, Alain, 2010. "Indeterminacy and expectation-driven fluctuations with non-separable preferences," Mathematical Social Sciences, Elsevier, vol. 60(1), pages 46-56, July.
  3. Chryssi Giannitsarou, 2004. "Balanced Budget Rules and Aggregate Instability: The Role of Consumption Taxes," Econometric Society 2004 North American Winter Meetings 498, Econometric Society.
  4. Eric W. Bond & Kazumichi Iwasa & Kazuo Nishimura, 2012. "The dynamic Heckscher–Ohlin model: A diagrammatic analysis," International Journal of Economic Theory, The International Society for Economic Theory, vol. 8(2), pages 197-211, 06.
  5. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 825-853, August.
  6. 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.
  7. Benhabib, Jess & Nishimura, Kazuo, 1998. "Indeterminacy and Sunspots with Constant Returns," Journal of Economic Theory, Elsevier, vol. 81(1), pages 58-96, July.
  8. Benhabib, Jess & Farmer, Roger E.A., 1995. "Indeterminacy and Sector-Specific Externalities," Working Papers 95-02, C.V. Starr Center for Applied Economics, New York University.
  9. Nourry, Carine & Seegmuller, Thomas & Venditti, Alain, 2013. "Aggregate instability under balanced-budget consumption taxes: A re-examination," Journal of Economic Theory, Elsevier, vol. 148(5), pages 1977-2006.
  10. Lane, Philip R., 2003. "The cyclical behaviour of fiscal policy: evidence from the OECD," Journal of Public Economics, Elsevier, vol. 87(12), pages 2661-2675, December.
  11. Takahashi, Harutaka & Mashiyama, Koichi & Sakagami, Tomoya, 2012. "Does The Capital Intensity Matter? Evidence From The Postwar Japanese Economy And Other Oecd Countries," Macroeconomic Dynamics, Cambridge University Press, vol. 16(S1), pages 103-116, April.
  12. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  13. Narayana R. Kocherlakota, 1995. "The equity premium: it's still a puzzle," Discussion Paper / Institute for Empirical Macroeconomics 102, Federal Reserve Bank of Minneapolis.
  14. Jonathan Gruber, 2006. "A Tax-Based Estimate of the Elasticity of Intertemporal Substitution," NBER Working Papers 11945, National Bureau of Economic Research, Inc.
  15. Benhabib, Jess & Nishimura, Kazuo, 1983. "Competitive Equilibrium Cycles," Working Papers 83-30, C.V. Starr Center for Applied Economics, New York University.
  16. Casey B. Mulligan, 2002. "Capital, Interest, and Aggregate Intertemporal Substitution," NBER Working Papers 9373, National Bureau of Economic Research, Inc.
  17. Aurélien W. Saïdi, 2011. "Balanced‐budget rule, distortionary taxes and aggregate stability," International Journal of Economic Theory, The International Society for Economic Theory, vol. 7(3), pages 293-300, 09.
  18. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," NBER Working Papers 8896, National Bureau of Economic Research, Inc.
  19. Baxter, Marianne, 1996. "Are Consumer Durables Important for Business Cycles?," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 147-55, February.
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