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Procyclical endogenous taxation and aggregate instability

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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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    More about this item

    Keywords

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

    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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