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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. Juan C. Ferrero, 2003. "The statistical distribution of money and the rate of money transference," Papers cond-mat/0306322, arXiv.org.
  2. Benhabib, J. & Farmer, R.E.A, 1991. "Indeterminacy and Increasing Returns," Papers 165, Cambridge - Risk, Information & Quantity Signals.
  3. Sala-I-Martin, X. & Barro, R.J., 1991. "Public Finance in Models of Economic Growth," Papers 640, Yale - Economic Growth Center.
  4. Cazzavillan, Guido, 1996. "Public Spending, Endogenous Growth, and Endogenous Fluctuations," Journal of Economic Theory, Elsevier, vol. 71(2), pages 394-415, November.
  5. Basu, Susanto & Fernald, John G, 1997. "Returns to Scale in U.S. Production: Estimates and Implications," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 249-83, April.
  6. 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.).
  7. Guo, Jang-Ting, 1999. "Multiple equilibria and progressive taxation of labor income," Economics Letters, Elsevier, vol. 65(1), pages 97-103, October.
  8. Slobodyan, Sergey, 2005. "Indeterminacy, sunspots, and development traps," Journal of Economic Dynamics and Control, Elsevier, vol. 29(1-2), pages 159-185, January.
  9. 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.
  10. Wen, Yi, 1998. "Capacity Utilization under Increasing Returns to Scale," Journal of Economic Theory, Elsevier, vol. 81(1), pages 7-36, July.
  11. Weder, Mark, 1999. "Indeterminacy in the small open economy Ramsey growth model," SFB 373 Discussion Papers 1999,30, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  12. Laitner, John & Stolyarov, Dmitriy, 2004. "Aggregate returns to scale and embodied technical change: theory and measurement using stock market data," Journal of Monetary Economics, Elsevier, vol. 51(1), pages 191-233, January.
  13. McDonald, James B & Ransom, Michael R, 1979. "Functional Forms, Estimation Techniques and the Distribution of Income," Econometrica, Econometric Society, vol. 47(6), pages 1513-25, November.
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