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Balanced-Budget Rule, distortionary taxes and Aggregate Instability: A Comment

Aurélien Saidi

No 2008-44, EconomiX Working Papers from University of Paris Nanterre, EconomiX

Abstract: It has been shown that under perfect competition and constant returns-to-scale, a one-sector growth model may exhibit local indeterminacy when income tax rates are endogenously determined by a balanced-budget rule while government expendi- tures are fixed. This paper shows that the associated aggregate instability does not ensue from the local indeterminacy of a specific stationary equilibrium but from the multiplicity of the stationary equilibria and persists under local determinacy of all of them. We provide a global analysis of the Schmitt-Grohe and Uribe model [1997] and study specific cases that were not investigated in the original paper, when aggregate instability is inherited from the coexistence of two saddle-path equilibria on one hand and from the connection of the two steady states on the other hand.

Keywords: Balanced-budget rule; Increasing returns; Indeterminacy; Saddle-sink connection (search for similar items in EconPapers)
JEL-codes: E32 E4 E62 H61 O42 O47 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2008
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:drm:wpaper:2008-44

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