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Sectoral Composition of Government Spending and Macroeconomic (In)stability

Listed author(s):
  • 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 models 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 economys 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
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. 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.
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  24. Jang-Ting Guo & Kevin J. Lansing, 1997. "Indeterminacy and stabilization policy," Working Paper 9708, Federal Reserve Bank of Cleveland.
  25. Gokan Yoichi, 2013. "Income taxes and endogenous fluctuations: a generalization," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 17(4), pages 461-482, September.
  26. 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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  28. 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.
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