Increasing Returns, Balanced-Budget Rules, and Aggregate Fluctuations

Maxime Menuet, Alexandru Minea and Patrick Villieu

Working Papers from HAL

Abstract: In a seminal contribution, Guo and Harrison (2004, JET) showed that, under a balanced-budget rule, the neoclassical growth model exhibits saddle-path stability when the adjustment is based on wasteful public spending. The present paper challenges this result in an endogenous growth framework with non-trivial dynamics of the debt-to-GDP ratio. We show that the emergence of aggregate instability dramatically depends on the strength of social labor externalities. If the labor demand is positively sloped and steeper than the labor supply, two reachable balanced-growth paths appear-a no growth trap, and a positive growth solution-that gives birth to both local and global indeterminacy, hence aggregate instability driven by self-fulfilling beliefs (sunspots). In addition, we show that a fiscal rule such that the tax rate strongly responds to public-debt increases can remove the no-growth trap, and secure positive long-run growth. JEL classification: E62; O41

Keywords: Endogenous growth; indeterminacy; balanced-budget rules (search for similar items in EconPapers)
Date: 2019-07-01
New Economics Papers: this item is included in nep-mac
Note: View the original document on HAL open archive server: https://hal.science/hal-02153853v2
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://hal.science/hal-02153853v2/document (application/pdf)

Related works:
Working Paper: Increasing Returns, Balanced-Budget Rules, and Aggregate Fluctuations (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-02153853

Access Statistics for this paper

More papers in Working Papers from HAL
Bibliographic data for series maintained by CCSD ().