 Stabilization policy and indeterminacy in a small open economyYan Zhang Economic Modelling, 2020, vol. 90, issue C, 159-167 Abstract: This paper studies the (de)stabilizing effects of income tax rules in a two-sector small open economy with production externalities. The paper shows that in the model with positive sector-specific externalities in the investment sector and negative sector-specific externalities in the consumption sector (or positive aggregate investment externalities), a regressive income tax rule can stabilize such an economy against indeterminacy, whereas a progressive income tax rule can increase the tendency for indeterminacy to occur. This paper also studies two variants that consider an imperfect world bond market and an endogenous labor supply, respectively, and shows that the qualitative results stated above remain valid. Moreover, increasing the level of sector-specific investment externalities can decrease (increase) the minimal level of tax progressivity required for indeterminacy if the investment externalities are below (above) a certain critical value and if the negative externalities in the consumption sector are taken as given. Keywords: Local indeterminacy; Small open economy; Tax progressivity (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:90:y:2020:i:c:p:159-167 DOI: 10.1016/j.econmod.2020.02.045 Access Statistics for this article Economic Modelling is currently edited by S. Hall and P. Pauly More articles in Economic Modelling from Elsevier |
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