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Procyclical endogenous taxation and aggregate instability

Author

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  • Mauro Bambi
  • Siritas Kettanurak

Abstract

The existing contributions on endogenous taxation, and balanced budget rules, suggest that countercyclical taxes should be avoided, because they may lead to aggregate instability (i.e. sunspot equilibria); on the other hand, procyclical taxes have always been praised for their stabilizing role. In this paper, we re-examine this issue in an endogenous growth model with productive government investment, and we prove that an economy with procyclical taxes, and a sufficiently large income effect, can still be characterized by i) global indeterminacy because two balanced growth paths may exist; ii) aggregate instability around the balanced growth path with the lowest growth rate. Finally, we show that this dynamics may emerge for reasonable choices of the parameters.

Suggested Citation

  • Mauro Bambi & Siritas Kettanurak, 2017. "Procyclical endogenous taxation and aggregate instability," Discussion Papers 17/15, Department of Economics, University of York.
  • Handle: RePEc:yor:yorken:17/15
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    References listed on IDEAS

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    1. Park, Hyun & Philippopoulos, Apostolis, 2004. "Indeterminacy and fiscal policies in a growing economy," Journal of Economic Dynamics and Control, Elsevier, vol. 28(4), pages 645-660, January.
    2. Chryssi Giannitsarou, 2007. "Balanced Budget Rules and Aggregate Instability: The Role of Consumption Taxes," Economic Journal, Royal Economic Society, vol. 117(523), pages 1423-1435, October.
    3. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
    4. Cazzavillan, Guido, 1996. "Public Spending, Endogenous Growth, and Endogenous Fluctuations," Journal of Economic Theory, Elsevier, vol. 71(2), pages 394-415, November.
    5. Torsten Persson & Guido Tabellini, 2002. "Political Economics: Explaining Economic Policy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661314, May.
    6. Mauro Bambi & Alain Venditti, 2016. "Time-varying Consumption Tax, Productive Government Spending, and Aggregate Instability," Discussion Papers 16/01, Department of Economics, University of York.
    7. Lane, Philip R., 2003. "The cyclical behaviour of fiscal policy: evidence from the OECD," Journal of Public Economics, Elsevier, vol. 87(12), pages 2661-2675, December.
    8. Nir Jaimovich & Sergio Rebelo, 2009. "Can News about the Future Drive the Business Cycle?," American Economic Review, American Economic Association, vol. 99(4), pages 1097-1118, September.
    9. Teresa Lloyd-Braga & Leonor Modesto & Thomas Seegmuller, 2008. "Tax Rate Variability and Public Spending as Sources of Indeterminacy," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(3), pages 399-421, June.
    10. Futagami, Koichi & Morita, Yuichi & Shibata, Akihisa, 1993. " Dynamic Analysis of an Endogenous Growth Model with Public Capital," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(4), pages 607-625, December.
    11. 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.
    12. repec:hal:journl:halshs-00194395 is not listed on IDEAS
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    More about this item

    Keywords

    Endogenous growth; time-varying consumption tax; local and global indeterminacy.;

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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