Can Consumption Taxes Stabilize the Economy in the Presence of Consumption Externalities?

Teresa Lloyd-Braga and Leonor Modesto

Chapter Chapter 11 in Sunspots and Non-Linear Dynamics, 2017, pp 259-278 from Springer

Abstract: Abstract We discuss the stabilization role of consumption taxes under a balanced-budget rule in the presence of consumption externalities of the “keeping up with the Joneses” type. We consider a finance constrained economy and depart from a situation where sufficiently strong externalities make the steady state indeterminate, if government intervention is absent. Sufficiently procyclical consumption tax rates are able to ensure local saddle path stability. However, this procyclicality leads to the appearance of another steady state with lower levels of output which is a source or indeterminate. Therefore, government intervention with stabilization purposes may not be successful.

Keywords: Indeterminacy; Consumption externalities; Consumption taxation; Steady state multiplicity; E32; E62 (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:spr:steccp:978-3-319-44076-7_11

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DOI: 10.1007/978-3-319-44076-7_11

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