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Equilibrium dynamics under lump-sum taxation in an exchange economy with skewed endowments

  • Mikko Puhakka

    (Bank of Finland)

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    I explore the dynamics in overlapping generations models with pure exchange and lump-sum taxes, when the second period after tax endowment is negative, and contrast the characteristics of equilibria to those of models with positive after tax endowments. In particular, if the intertemporal elasticity of substitution is less than unity, there can be only a two cycle or stable (ie indeterminate) equilibria for certain parameter values. With this value for that elasticity chaos and a cycle of any order can occur in a model with regular endowments. In a sense the lump-sum taxation in this model operates as a stabilizing device. The precise stability condition holds with a small discount factor and in economies with relatively high taxes in the first period. If the intertemporal elasticity of substitution is greater than unity, the steady state equilibria are unstable, and thus determinate, as is the case with the regular model.

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    File URL: http://econwpa.repec.org/eps/mac/papers/0508/0508033.pdf
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    Paper provided by EconWPA in its series Macroeconomics with number 0508033.

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    Length: 25 pages
    Date of creation: 31 Aug 2005
    Date of revision:
    Handle: RePEc:wpa:wuwpma:0508033
    Note: Type of Document - pdf; pages: 25. Bank of Finland Discussion Papers 29/2004
    Contact details of provider: Web page: http://econwpa.repec.org

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