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One Sector Models, Indeterminacy, and Productive Public Spending

  • Sergey Slobodyan

This paper studies the influence of different modelling assumptions on the stability of the steady state in one--sector models of economic growth with externalities in the production function. We start with a standard Benhabib&Farmer 1994 one--sector model and study the combined effect on the stability of variable capital utilization, progressive taxation, and productive public spending subject to congestion. As was shown earlier by Wen 1998, variable capacity utilization leads to indeterminacy or absolute instability for low degrees of social increasing returns to scale. Introduction of productive public spending further lowers the degree of IRS necessary to break saddle--path stability of the steady state. The degree of progressivity of the tax schedule influences only the indeterminate and absolute unstable regions in the space spanned by externality parameters. More progressive tax schedule increases the area of indeterminacy at the expense of the absolute instablity region. We perform calibration of the model to the tax regimes observed in the USA

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 314.

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Date of creation: 11 Aug 2004
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Handle: RePEc:sce:scecf4:314
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  1. Stephanie Schmitt-Grohe & Martin Uribe, 1995. "Balanced-budget rules, distortionary taxes, and aggregate instability," Finance and Economics Discussion Series 95-44, Board of Governors of the Federal Reserve System (U.S.).
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  5. Sergey Slobodyan, 2002. "Indeterminacy, Sunspots, and Development Traps," Computing in Economics and Finance 2002 255, Society for Computational Economics.
  6. Jess Benhabib & Roger E.A. Farmer, 1992. "Indeterminacy and Increasing Returns," UCLA Economics Working Papers 646, UCLA Department of Economics.
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  9. Cazzavillan, Guido, 1996. "Public Spending, Endogenous Growth, and Endogenous Fluctuations," Journal of Economic Theory, Elsevier, vol. 71(2), pages 394-415, November.
  10. Barro, Robert J. & Sala-i-Martin, Xavier, 1992. "Public Finance in Models of Economic Growth," CEPR Discussion Papers 630, C.E.P.R. Discussion Papers.
  11. Jang-Ting Guo & Sharon G. Harrison, 2001. "Tax Policy and Stability in a Model with Sector-Specific Externalities," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(1), pages 75-89, January.
  12. Juan C. Ferrero, 2003. "The statistical distribution of money and the rate of money transference," Papers cond-mat/0306322,
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