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Tax Rate Variability and Public Spending as Sources of Indeterminacy

Author

Listed:
  • Teresa Lloyd-Braga

    () (FCEE - Faculdade de Ciencias Economicas e Empresariais - Universidade Catolica Portuguesa)

  • Leonor Modesto

    () (FCEE - Faculdade de Ciencias Economicas e Empresariais - Universidade Catolica Portuguesa)

  • Thomas Seegmuller

    () (CES - Centre d'économie de la Sorbonne - CNRS - Centre National de la Recherche Scientifique - UP1 - Université Panthéon-Sorbonne, PSE - Paris School of Economics)

Abstract

We consider a constant returns to scale, one sector economy with segmented asset markets of the Woodford (1986) type. We analyze the role of public spending, financed by labor income and consumption taxation, on the emergence of indeterminacy. We find that what is relevant for indeterminacy is the variability of the distortion introduced by government intervention. We further discuss the results in terms of the level of the tax rate, its variability with respect to the tax base and the degree of externalities in preferences due to the existence of a public good. We show that the degree of public spending externalities affects the combinations between the tax rate and its variability under which indeterminacy occurs. Moreover, in contrast to previous results, we find that consumption taxes can lead to local indeterminacy when asset markets are segmented.

Suggested Citation

  • Teresa Lloyd-Braga & Leonor Modesto & Thomas Seegmuller, 2008. "Tax Rate Variability and Public Spending as Sources of Indeterminacy," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00194395, HAL.
  • Handle: RePEc:hal:cesptp:halshs-00194395
    DOI: 10.1111/j.1467-9779.2008.00369.x
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00194395
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Indeterminacy; public spending; taxation; segmented asset markets;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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