Macroeconomic Stability under Balanced-Budget Rules and No-Income-Effect Preferences

Jang-Ting Guo and Yan Zhang ()
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Yan Zhang: Shanghai University of Finance and Economics

No 201704, Working Papers from University of California at Riverside, Department of Economics

Abstract: It has been analytically shown that under an additively separable preference formulation between consumption and hours worked, indeterminacy and sunspots may arise in a standard one-sector real business cycle model when the labor tax rate is endogenously determined by a balanced-budget rule with a pre-specified constant level of government expenditures. This paper finds that local indeterminacy disappears if the period utility function is postulated to exhibit no income effect on the household's demand for leisure. In particular, the model's low-tax steady state always displays saddle-path stability and equilibrium uniqueness; whereas the high-tax steady state is either a source or a saddle point.

Keywords: Keywords: Income Effect; Balanced-Budget Rules; Indeterminacy; Business Cycles. (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
Date: 2017-04
New Economics Papers: this item is included in nep-dge, nep-mac and nep-upt
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https://economics.ucr.edu/repec/ucr/wpaper/201704.pdf First version, 2017 (application/pdf)

Related works:
Journal Article: Macroeconomic stability under balanced‐budget rules and no‐income‐effect preferences (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:ucr:wpaper:201704

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