Balanced‐budget rules and aggregate instability: The role of consumption taxes in a monetary economy

Jianpo Xue and Chong Yip

Pacific Economic Review, 2019, vol. 24, issue 3, 403-415

Abstract: In a real macroeconomic model, it is well established that a balanced‐budget rule based on consumption tax can rule out indeterminacy. The present paper shows, both analytically and numerically, that such a balanced‐budget rule induces indeterminacy and, hence, aggregate instability in a standard one‐sector cash‐in‐advance economy. From a policy perspective, our results raise possible concerns that balanced‐budget rules with endogenous consumption tax could have destabilizing effects under the current over‐easy monetary environment.

Date: 2019
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https://doi.org/10.1111/1468-0106.12236

Related works:
Working Paper: Balanced-Budget Rules and Aggregate Instability: The Role of Consumption Taxes in a Monetary Economy (2013)
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