Progressive taxation and (in)stability in an exogenous growth model with Epstein-Zin recursive preferences

Aleksandar Vasilev

Journal of Economics and Econometrics, 2021, vol. 64, issue 1, 51-68

Abstract: We show that in a exogenous growth model with Epstein-Zin (1989, 1991) recursive preferences calibrated to Bulgarian data under the progressive taxation regime (1993-2007), the economy exhibits equilibrium indeterminacy. These results are in line with the findings in Benhabib and Farmer (1994, 1996) and Farmer (1999). Also, the findings in this paper are in contrast to Guo and Lansing (1988) who argue that progressive taxation works as an automatic stabilizer. In contrast, under the flat tax regime (2008-16), the same economy calibrated to Bulgarian data now displays saddle-path stability. The decrease in the average effective tax rate addresses the indeterminacy issue and eliminates the †sink†dynamics.

Keywords: Progressive taxation; Epstein-Zin preferences; Equilibrium (In)determinacy; Bulgaria (search for similar items in EconPapers)
JEL-codes: D51 D91 H22 J46 O41 (search for similar items in EconPapers)
Date: 2021
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Related works:
Journal Article: Progressive taxation and (in)stability in an exogenous growth model with Epstein-Zin recursive preferences (2020)
Working Paper: Progressive taxation and (in)stability in an exogenous growth model with Epstein-Zin recursive preferences (2019)
Working Paper: Progressive taxation and (in)stability in an exogenous growth model with Epstein-Zin recursive preferences (2018)
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