Balanced-Budget Rules and Aggregate Instability: The Role of Consumption Taxes in a Monetary Economy

Jianpo Xue and Chong Yip

No 112013, Working Papers from Hong Kong Institute for Monetary Research

Abstract: This paper examines the stabilizing property of consumption taxation in a balanced-budget setting of a neoclassical one-sector cash-in-advance economy. We find that saddle-path stability is not a necessary outcome even though the utility function is additively separable between consumption and leisure. Both the existence of a Laffer curve and the indeterminacy outcome of consumption taxation depend on the elasticities of intertemporal substitution in consumption and of labor supply. Numerical examples show that consumption tax may lead to aggregate instability for the OECD countries under the current over-easy monetary policies.

Keywords: Balanced-Budget Rules; Consumption Tax; CIA Constraint; Indeterminacy (search for similar items in EconPapers)
JEL-codes: E32 E63 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2013-08
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Balanced‐budget rules and aggregate instability: The role of consumption taxes in a monetary economy (2019)
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