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Equilibrium Dynamics in a Two-Sector Model with Taxes

  • Ortigueira, Salvador

    (Cornell U)

  • Santos, Manuel S.

    (Arizona State U, Tempe)

In this paper we are concerned with the equilibrium dynamics of a two-sector model of endogenous growth with distortionary taxes. We show that for certain parameters values and tax schemes every equilibrium orbit--except the steady state solution--is non-interior; i.e., there are times in which one of the sectors is inactive. This analysis confirms that in multisector models the set of easily checkable, universal conditions that can guarantee the interiority of equilibrium solutions is rather limited.

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File URL: http://www.arts.cornell.edu/econ/CAE/taxes.pdf
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Paper provided by Cornell University, Center for Analytic Economics in its series Working Papers with number 01-17.

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Date of creation: Apr 2001
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Handle: RePEc:ecl:corcae:01-17
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  1. Nancy L. Stokey & Sergio Rebelo, 1993. "Growth Effects of Flat-Rate Taxes," NBER Working Papers 4426, National Bureau of Economic Research, Inc.
  2. Antonio Ladron de Guevara & Salvador Ortigueira & Manuel S. Santos, 1994. "Equilibrium Dynamics in Two-Sector Models of Endogenous Growth," Working Papers 9403, Centro de Investigacion Economica, ITAM.
  3. Kiminori Matsuyama, 1999. "Growing Through Cycles," Econometrica, Econometric Society, vol. 67(2), pages 335-348, March.
  4. Mulligan, C.B. & Sala-i-Martin, X., 1992. "Transitional Dynamics in Two-Sector Models of Endogenous Growth," Papers 651, Yale - Economic Growth Center.
  5. Ellen R. McGrattan & James A. Schmitz, Jr., 1998. "Explaining cross-country income differences," Staff Report 250, Federal Reserve Bank of Minneapolis.
  6. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June.
  7. Eric W. Bond & Ping Wang & Chong K. Yip, 1993. "A general two-sector model of endogenous growth with human and physical capital: balanced growth and transitional dynamics," Research Paper 9324, Federal Reserve Bank of Dallas.
  8. Salvador Ortigueira, 1999. "Equilibrium Indeterminacy in an Endogenous Growth Model: Debt as a Coordination Device," Working Papers 9901, Centro de Investigacion Economica, ITAM.
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