IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Institute of Economics, Academia Sinica, Taipei, Taiwan in its series IEAS Working Paper : academic research with number 13-A010.

in new window

Length: 20 pages
Date of creation: Oct 2013
Date of revision:
Handle: RePEc:sin:wpaper:13-a010
Contact details of provider: Phone: 886-2-27822791
Fax: 886-2-27853946
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. 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.
  2. Lloyd-Braga, Teresa & Modesto, Leonor & Seegmuller, Thomas, 2006. "Tax Rate Variability and Public Spending as Sources of Inderterminacy," CEPR Discussion Papers 5796, C.E.P.R. Discussion Papers.
  3. Dressler, Scott, 2008. "Economies of scale in banking, indeterminacy, and monetary policy," MPRA Paper 8370, University Library of Munich, Germany.
  4. Sharon Harrison & Jang-Ting Guo, 2008. "Indeterminacy with No-Income-Effect Preferences and Sector-Specifc Externalities," Working Papers 0801, Barnard College, Department of Economics.
  5. Roger E.A. Farmer, 1994. "Indeterminacy and Sector-Specific Externalities," UCLA Economics Working Papers 722, UCLA Department of Economics.
  6. Alfred Greiner, 2006. "Progressive Taxation, Public Capital, and Endogenous Growth," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 62(3), pages 353-366, September.
  7. Lawrence J. Christiano & Sharon G. Harrison, 1996. "Chaos, Sunspots, and Automatic Stabilizers," NBER Working Papers 5703, National Bureau of Economic Research, Inc.
  8. Chen, Shu-Hua & Guo, Jang-Ting, 2013. "Progressive taxation and macroeconomic (In) stability with productive government spending," Journal of Economic Dynamics and Control, Elsevier, vol. 37(5), pages 951-963.
  9. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  10. Harrison, Sharon G., 2001. "Indeterminacy in a model with sector-specific externalities," Journal of Economic Dynamics and Control, Elsevier, vol. 25(5), pages 747-764, May.
  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. Giannitsarou, Chryssi, 2006. "Balanced Budget Rules and Aggregate Instability: The Role of Consumption Taxes," CEPR Discussion Papers 5531, C.E.P.R. Discussion Papers.
  13. Jaimovich, Nir & Rebelo, Sérgio, 2006. "Can News About the Future Drive the Business Cycle?," CEPR Discussion Papers 5877, C.E.P.R. Discussion Papers.
  14. Benhabib, J. & Farmer, R.E.A, 1991. "Indeterminacy and Increasing Returns," Papers 165, Cambridge - Risk, Information & Quantity Signals.
  15. ShuHua Chen & JangTing Guo, 2013. "On indeterminacy and growth under progressive taxation and productive government spending," Canadian Journal of Economics, Canadian Economics Association, vol. 46(3), pages 865-880, August.
  16. Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
  17. 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.).
  18. 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.
  19. Dromel, Nicolas L. & Pintus, Patrick A., 2007. "Linearly progressive income taxes and stabilization," Research in Economics, Elsevier, vol. 61(1), pages 25-29, March.
  20. Jang-Ting Guo & Kevin J. Lansing, 1997. "Indeterminacy and stabilization policy," Working Paper 9708, Federal Reserve Bank of Cleveland.
  21. 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.
  22. Gokan Yoichi, 2013. "Income taxes and endogenous fluctuations: a generalization," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 17(4), pages 461-482, September.
  23. 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.
  24. 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.
  25. Kazuo Mino & Yasuhiro Nakamoto, 2008. "Progressive Taxation, Wealth Distribution, and Macroeconomic Stability," Discussion Papers in Economics and Business 08-22, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  26. Xavier Raurich, 2001. "Indeterminancy and Government Spending in a Two-Sector Model of Endogenous Growth," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(1), pages 210-229, January.
  27. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
  28. repec:hal:journl:halshs-00194395 is not listed on IDEAS
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:sin:wpaper:13-a010. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (HsiaoyunLiu)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.