Aggregate instability under balanced-budget consumption taxes: A re-examination

Carine Nourry, Thomas Seegmuller and Alain Venditti

Journal of Economic Theory, 2013, vol. 148, issue 5, 1977-2006

Abstract: We re-examine the destabilizing role of balanced-budget fiscal policy rules based on consumption taxation. Using a one-sector model with infinitely-lived households, we consider a specification of preferences derived from Jaimovich (2008) [14] and Jaimovich and Rebelo (2009) [15] which is flexible enough to encompass varying degrees of income effect. When the income effect is not too large, we show that there exists a Laffer curve, which explains the multiplicity of steady states, and that non-linear consumption taxation may destabilize the economy, promoting expectation-driven fluctuations, if the elasticity of intertemporal substitution in consumption is sufficiently larger than one and the tax rate is counter-cyclical with respect to consumption. Numerical illustrations also show that consumption taxation may be a source of instability for most OECD countries for a wide range of structural parametersʼ configurations. We finally prove the robustness of our conclusions if we consider a discrete-time setup.

Keywords: Indeterminacy; Endogenous business cycles; Consumption taxes; Income effect; Balanced-budget rule; Infinite-horizon model (search for similar items in EconPapers)
JEL-codes: C62 E32 H20 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (46)

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Related works:
Working Paper: Aggregate instability under balanced-budget consumption taxes: A re-examination (2013)
Working Paper: Aggregate instability under balanced-budget consumption taxes: a re-examination (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:148:y:2013:i:5:p:1977-2006

DOI: 10.1016/j.jet.2013.07.010

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