Balanced budget rules and macroeconomic stability with non-separable utility

Ludger Linnemann

Journal of Macroeconomics, 2008, vol. 30, issue 1, 199-215

Abstract: It is well known that equilibrium indeterminacy can arise in a neoclassical growth model when the government continuously balances its budget through adjustments of the income tax rate. This paper demonstrates that indeterminacy is unlikely to occur if preferences are not restricted to be additively separable between consumption and leisure, but are still required to be compatible with a steady state in which leisure is constant although consumption may grow. In this case, complementarity between consumption and employment emerges as a stabilizing mechanism. For tax rates in the empirically observable range, equilibrium determinacy under balanced budget policy obtains.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:30:y:2008:i:1:p:199-215

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