 Aggregate instability under balanced-budget consumption taxes: A re-examinationCarine Nourry, Thomas Seegmuller and Alain Venditti Post-Print from HAL Abstract: We re-examine the destabilizing role of balanced-budget fiscal policy rules based on consumption taxation. Using a one-sector model with infinitely-lived households, we consider a specification of preferences derived from Jaimovich (2008) [14] and Jaimovich and Rebelo (2009) [15] which is flexible enough to encompass varying degrees of income effect. When the income effect is not too large, we show that there exists a Laffer curve, which explains the multiplicity of steady states, and that non-linear consumption taxation may destabilize the economy, promoting expectation-driven fluctuations, if the elasticity of intertemporal substitution in consumption is sufficiently larger than one and the tax rate is counter-cyclical with respect to consumption. Numerical illustrations also show that consumption taxation may be a source of instability for most OECD countries for a wide range of structural parameters' configurations. We finally prove the robustness of our conclusions if we consider a discrete-time setup. Keywords: Balanced-budget rule; Consumption taxes; Endogenous business cycles; I; Income effect; indeterminacy (search for similar items in EconPapers) Published in Journal of Economic Theory, 2013, 148 (5), pp.1977-2006. ⟨10.1016/j.jet.2013.07.010⟩ There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01500883 DOI: 10.1016/j.jet.2013.07.010 Access Statistics for this paper More papers in Post-Print from HAL |
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