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Sectoral Composition of Government Spending and Macroeconomic (In)stability

  • Juin-Jen Chang

    ()

    (Institute of Economics, Academia Sinica, Taipei, Taiwan)

  • Jang-Ting Guo

    ()

    (University of California, Riverside, CA, USA)

  • Jhy-Yuan Shieh

    ()

    (Department of Economics, Soochow University, Taipei, Taiwan)

  • Wei-Neng Wang

    ()

    (Department of Economics, Soochow University, Taipei, Taiwan)

This paper examines the quantitative interrelations between sectoral composition of public spending and equilibrium (in)determinacy in a two-sector real business cycle model with positive productive externalities in investment. When government purchases of con- sumption and investment goods are set as constant fractions of their respective sectoral output, we show that the public-consumption share plays no role in the model’s local dynamics, and that a sufficiently high public-investment share can stabilize the economy against endogenous belief-driven cyclical ‡uctuations. When each type of government spending is postulated as a constant proportion of the economy’s total output, we find that there exists a trade-off between public consumption versus investment expenditures to yield saddle-path stability and equilibrium uniqueness.

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File URL: http://www.econ.sinica.edu.tw/UpFiles/2013092817175327692/Seminar_PDF2013093010102890633/13-A010(all).pdf
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Paper provided by Institute of Economics, Academia Sinica, Taipei, Taiwan in its series IEAS Working Paper : academic research with number 13-A010.

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Length: 20 pages
Date of creation: Oct 2013
Date of revision:
Handle: RePEc:sin:wpaper:13-a010
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Web page: http://www.econ.sinica.edu.tw/index.php?foreLang=en
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  1. Dromel, Nicolas L. & Pintus, Patrick A., 2007. "Linearly progressive income taxes and stabilization," Research in Economics, Elsevier, vol. 61(1), pages 25-29, March.
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  10. Nicolas L. Dromel & Patrick A. Pintus, 2008. "Are Progressive Income Taxes Stabilizing?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(3), pages 329-349, 06.
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  12. Nourry, Carine & Seegmuller, Thomas & Venditti, Alain, 2013. "Aggregate instability under balanced-budget consumption taxes: A re-examination," Journal of Economic Theory, Elsevier, vol. 148(5), pages 1977-2006.
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  27. repec:hal:journl:halshs-00194395 is not listed on IDEAS
  28. Sharon G. Harrison, 2003. "Returns to Scale and Externalities in the Consumption and Investment Sectors," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 963-976, October.
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