NONSEPARABLE PREFERENCES DO NOT RULE OUT AGGREGATE INSTABILITY UNDER BALANCED-BUDGET RULES: A NOTE

Nicolas Abad, Thomas Seegmuller and Alain Venditti

Macroeconomic Dynamics, 2017, vol. 21, issue 1, 259-277

Abstract: We investigate the role of nonseparable preferences in the occurrence of macroeconomic instability under a balanced-budget rule where government spending is financed by a tax on labor income. Considering a one-sector neoclassical growth model with a large class of nonseparable utility functions, we find that expectations-driven fluctuations occur easily when consumption and labor are Edgeworth substitutes or weak Edgeworth complements. Under these assumptions, an intermediate range of tax rates and a sufficiently low elasticity of intertemporal substitution in consumption lead to instability.

Date: 2017
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Related works:
Working Paper: Nonseparable preferences do not rule out aggregate instability under balanced-budget rules: a note (2017)
Working Paper: Non-Separable Preferences do not Rule Out Aggregate Instability under Balanced-Budget Rules: A Note (2014)
Working Paper: Non-Separable Preferences do not Rule Out Aggregate Instability under Balanced-Budget Rules: A Note (2014)
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