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Non-Separable Preferences do not Rule Out Aggregate Instability under Balanced-Budget Rules: A Note

Nicolas Abad, Thomas Seegmuller () and Alain Venditti ()
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Thomas Seegmuller: Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE, https://www.amse-aixmarseille.fr/users/seegmuller

No 1826, AMSE Working Papers from Aix-Marseille School of Economics, France

Abstract: We investigate the role of non-separable preferences on the occurrence of macroeconomic instability under a balanced-budget rule where government spending is financed by a tax on labor income. Considering a one-sector neoclassical growth model with a large class of non-separable utility functions, we find that expectations-driven fluctuations easily occur when consumption and labor are Edgeworth substitutes or weak Edgeworth complements. Under these properties, an intermediate range of tax rates and a sufficiently low elasticity of intertemporal substitution in consumption lead to instability.

Keywords: Indeterminacy; expectations-driven business cycles; labor income taxes; balanced-budget rule; non-separable preferences (search for similar items in EconPapers)
Date: 2014-11
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Related works:
Journal Article: NONSEPARABLE PREFERENCES DO NOT RULE OUT AGGREGATE INSTABILITY UNDER BALANCED-BUDGET RULES: A NOTE (2017) Downloads
Working Paper: Nonseparable preferences do not rule out aggregate instability under balanced-budget rules: a note (2017)
Working Paper: Non-Separable Preferences do not Rule Out Aggregate Instability under Balanced-Budget Rules: A Note (2014) Downloads
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