Sectoral composition of government spending, distortionary income taxation, and macroeconomic (in)stability

Juin-jen Chang, Jang-Ting Guo, Jhy-yuan Shieh and Wei‐Neng Wang

International Journal of Economic Theory, 2019, vol. 15, issue 1, 95-107

Abstract: This paper examines the interrelations between the sectoral composition of government spending and macroeconomic (in)stability in a two‐sector real business cycle model with positive productive externalities in investment and a balanced‐budget fiscal policy rule, whereby endogenous public expenditures are financed by the distortionary constant tax rate. Under the benchmark parameterization, our model always exhibits indeterminacy and sunspots provided the tax rate does not exceed a critical value. When the tax rate is raised to a higher level, a sufficiently high public‐consumption share can destabilize the macroeconomy by generating belief‐driven cyclical fluctuations. We also find that saddle‐path stability and equilibrium uniqueness will prevail when the household's labor supply elasticity is not higher than a threshold level. In addition, analytical proofs for each of the aforementioned quantitative results are provided.

Date: 2019
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://doi.org/10.1111/ijet.12203

Related works:
Working Paper: Sectoral Composition of Government Spending, Distortionary Income Taxation, and Macroeconomic (In)stabilit (2017)
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:bla:ijethy:v:15:y:2019:i:1:p:95-107

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=1742-7355

Access Statistics for this article

International Journal of Economic Theory is currently edited by Kazuo Nishimura and Makoto Yano

More articles in International Journal of Economic Theory from The International Society for Economic Theory
Bibliographic data for series maintained by Wiley Content Delivery ().