On Indeterminacy and Growth under Progressive Taxation and Utility‐Generating Government Spending

Shu‐Hua Chen and Jang-Ting Guo

Pacific Economic Review, 2018, vol. 23, issue 3, 533-543

Abstract: We examine the theoretical interrelations between progressive income taxation and macroeconomic (in)stability in an otherwise standard one‐sector AK model of endogenous growth with utility‐generating government purchases of goods and services. In sharp contrast to traditional Keynesian‐type stabilization policies, progressive taxation operates like an automatic destabilizer that generates equilibrium indeterminacy and belief‐driven fluctuations in our endogenously growing macroeconomy. Unlike the no‐sustained‐growth counterpart, this instability result is obtained regardless of (i) the degree of the public‐spending preference externality and (ii) whether private and public consumption expenditures are substitutes, complements or additively separable in the household's utility function.

Date: 2018
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