Income effects, stabilization policy, and indeterminacy in one-sector models

Yan Zhang ()
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Yan Zhang: Wenlan School of Business, Zhongnan University of Economics and Law

Annals of Economics and Finance, 2021, vol. 22, issue 1, 109-133

Abstract: The interrelations between indeterminacy and progressive income tax rules are discussed in a one-sector real business cycle model with capacity utilization, productive increasing returns, and the Jaimovich-Rebelo preferences that exhibit varying degrees of income effect. When the values of income effect are large and the other parameter values are plausible, a moderately progressive income tax schedule can destabilize the economy by generating local indeterminacy. Moreover, numerical examples show that when an income tax schedule with a progressivity feature destabilizes the economy, the degree of income effect and the minimum level of increasing returns required for local indeterminacy are negatively related. These results are in contrast to those obtained in Guo and Lansing (1998), in which a progressive tax schedule can stabilize the one-sector economy with increasing returns.

Keywords: Progressive income tax schedules; Income effects; Local indeterminacy (search for similar items in EconPapers)
JEL-codes: E30 E32 E62 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:cuf:journl:y:2021:v:22:i:1:zhang

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