On indeterminacy and growth under progressive taxation and productive government spending

ShuHua Chen and JangTing Guo

Canadian Journal of Economics, 2013, vol. 46, issue 3, 865-880

Abstract: We examine the theoretical interrelations between equilibrium (in)determinacy and economic growth in a onesector representativeagent model of endogenous growth with progressive taxation of income and productive flow of public spending. We analytically show that, if the demandside effect of government purchases is weaker, the economy exhibits an indeterminate balancedgrowth equilibrium and beliefdriven growth fluctuations when the tax schedule is sufficiently progressive or regressive. If the supplyside effect of public expenditures is weaker, indeterminacy and sunspots arise under progressive income taxation. In sharp contrast to traditional Keynesiantype stabilization policies, our analysis finds that raising the tax progressivity may destabilize an endogenously growing economy with fluctuations driven by agents selffulfilling expectations.

JEL-codes: E62 O41 (search for similar items in EconPapers)
Date: 2013
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