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Tax Rate Variability and Public Spending as Sources of Inderterminacy

Teresa Lloyd-Braga (), Leonor Modesto () and Thomas Seegmuller ()

No 5796, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We consider a constant returns to scale, one sector economy with segmented asset markets, encompassing both the Woodford (1986) and overlapping generations models. We analyze the role of public spending, financed by (labour or capital) income and consumption taxation, on the emergence of indeterminacy. We find that what is relevant for indeterminacy is the variability of the distortion introduced by government intervention. We further discuss the results in terms of the level of the tax rate, its variability with respect to the tax base and the degree of externalities in preferences due to the existence of a public good. We show that the degree of public spending externalities affects the combinations between the tax rate and its variability under which indeterminacy occurs. Moreover, in contrast to previous results, we find that consumption taxes can lead to local indeterminacy when asset markets are segmented.

Keywords: indeterminacy; public spending; segmented asset markets; taxation (search for similar items in EconPapers)
JEL-codes: E32 E63 H23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
Date: 2006-08
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Journal Article: Tax Rate Variability and Public Spending as Sources of Indeterminacy (2008) Downloads
Working Paper: Tax Rate Variability and Public Spending as Sources of Indeterminacy (2008) Downloads
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