Balanced Budget Rules and Aggregate Instability: The Role of Consumption Taxes

Chryssi Giannitsarou ()

No 5531, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: It is known that, in the context of a real business cycle model with constant returns to scale and a balanced budget fiscal policy rule, steady state indeterminacy may arise as a result of endogenous labor income tax rates. In this paper, it is shown that when the government finances its expenditures via an endogenous consumption tax instead, there exists a unique steady state which is always saddle-path stable. As a result, combining income taxes with consumption taxes makes the ranges of indeterminacy shrink, thus reducing the possibility of aggregate instability. From a policy perspective, the results provide an additional argument in favor of (less distortionary) consumption taxes in place of capital taxes.

Keywords: balanced budget rules; consumption tax; fiscal policy; indeterminacy (search for similar items in EconPapers)
JEL-codes: C62 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
Date: 2006-03
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Related works:
Working Paper: Balanced Budget Rules and Aggregate Instability: The Role of Consumption Taxes (2004)
Working Paper: Balanced Budget Rules and Aggregate Instability: The Role of Consumption Taxes (2004)
Journal Article: Balanced Budget Rules and Aggregate Instability: The Role of Consumption Taxes (2007)
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