Balanced-budget rules and macroeconomic stability with overlapping generations

Jang-Ting Guo and Yan Zhang

Journal of Macroeconomics, 2022, vol. 74, issue C

Abstract: In the context of a stylized two-period overlapping generations model, this paper examines the macroeconomic (in)stability effects of a balanced-budget rule whereby constant government spending is financed by endogenous taxation on agents’ labor income or consumption expenditures. In sharp contrast to previous studies for a representative-agent framework, our baseline economy always exhibits local equilibrium uniqueness, hence both labor and consumption taxes are stabilizing instruments that will not lead to business cycle fluctuations driven by animal spirits. Moreover, this no-indeterminacy result and associated dynamic equivalence between endogenous labor versus consumption taxation remain qualitatively robust to various modifications in the household-preference or firm-production formulations.

Keywords: Balanced-budget rules; Indeterminacy; Overlapping generations model (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:74:y:2022:i:c:s0164070422000507

DOI: 10.1016/j.jmacro.2022.103455

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