Real Business Cycles and Automatic Stabilizers
Empirical evidence documents a discernible negative relationship between government size, as measured by income tax rates and the output share of government purchases, and the magnitude of macroeconomic fluctuations in OECD countries since 1960. This implies that both taxes and public spending seem to be effectively working as "automatic stabilizers". In this paper, we examine the effects of income taxes and government consumption on output variability in several versions of infinite-horizon representative agent (real business cycle, RBC) models with equilibrium determinacy and exogenous productivity shocks. In particular, we allow for either one or two sectors of production, either a constant or increasing returns-to-scale technology, and two different formulations of the household utility function. We also incorporate debt-financed borrowing by the government into the analysis. As Gali (1994, European Economic Review) has shown, in the one-sector RBC model with constant returns in production, utility logarithmic in both consumption and leisure, and government borrowing, income taxes are destabilizing and government purchases are stabilizing. However, we find the opposite results when the household utility is logarithmic in consumption and convex in hours worked. That is, income taxes are now stabilizing and government purchases are destabilizing. Moreover, these results are robust to allowing for increasing returns-to-scale and/or a balanced-budget rule. In sum, our analysis illustrates that in the context of RBC models, the stabilization effects of fiscal policy depend crucially on how hours worked enter the household utility function and the associated labor-market behavior.
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:||11 Aug 2004|
|Contact details of provider:|| Phone: 1 212 998 3820|
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:ecm:nasm04:201. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.