Balanced-Budget Rule, distortionary taxes and Aggregate Instability: A Comment

Aurélien Saïdi ()
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Aurélien Saïdi: EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique

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Abstract: It has been shown that under perfect competition and constant returns-to-scale, a one-sector growth model may exhibit local indeterminacy when income tax rates are endogenously determined by a balanced-budget rule while government expendi- tures are fixed. This paper shows that the associated aggregate instability does not ensue from the local indeterminacy of a specific stationary equilibrium but from the multiplicity of the stationary equilibria and persists under local determinacy of all of them. We provide a global analysis of the Schmitt-Grohe and Uribe model [1997] and study specific cases that were not investigated in the original paper, when aggregate instability is inherited from the coexistence of two saddle-path equilibria on one hand and from the connection of the two steady states on the other hand.

Keywords: Balanced-budget rule; Increasing returns; Indeterminacy; Saddle-sink connection (search for similar items in EconPapers)
Date: 2011
Note: View the original document on HAL open archive server: https://hal.science/hal-04140707v1
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Published in International Journal of Economic Theory, 2011, 7 (3), pp.293-300

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