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Dynamic effects of government expenditure in a finance constrained economy: A Note

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  • Chen, Yan
  • Zhang, Yan

Abstract

Gokan [Dynamic effects of government expenditure in a finance constrained economy, J. Econ. Theory 127 (2006) 323-333] introduces constant government expenditure (financed by labor income taxes) in Woodford's model with capital-labor substitution and investigates how local dynamics near two steady states depend upon the elasticity of substitution between capital and labor. In this paper, we show that the local dynamics will change dramatically if the government transfers its revenue to the households (workers) in a lump sum way. In particular, we question the result that the rate of money growth has no impact on the model dynamics. In a numerical example, we illustrate that the result previously obtained is not robust to the alternative assumption.

Suggested Citation

  • Chen, Yan & Zhang, Yan, 2009. "Dynamic effects of government expenditure in a finance constrained economy: A Note," MPRA Paper 15138, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:15138
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    References listed on IDEAS

    as
    1. 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.
    2. Gokan, Yoichi, 2006. "Dynamic effects of government expenditure in a finance constrained economy," Journal of Economic Theory, Elsevier, vol. 127(1), pages 323-333, March.
    3. Grandmont, Jean-Michel & Pintus, Patrick & de Vilder, Robin, 1998. "Capital-Labor Substitution and Competitive Nonlinear Endogenous Business Cycles," Journal of Economic Theory, Elsevier, vol. 80(1), pages 14-59, May.
    4. Woodford, Michael, 1986. "Stationary sunspot equilibria in a finance constrained economy," Journal of Economic Theory, Elsevier, vol. 40(1), pages 128-137, October.
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    More about this item

    Keywords

    a lump sum transfer; indeterminacy.;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium

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