Nonseparable preferences do not rule out aggregate instability under balanced-budget rules: a note

Nicolas Abad, Thomas Seegmuller and Alain Venditti

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Abstract: We investigate the role of nonseparable preferences in 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 nonseparable utility functions, we find that expectations-driven fluctuations occur easily when consumption and labor are Edgeworth substitutes or weak Edgeworth complements. Under these assumptions, 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; Economie quantitative (search for similar items in EconPapers)
Date: 2017-01
Note: View the original document on HAL open archive server: https://amu.hal.science/hal-01505770v1
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Citations: View citations in EconPapers (19)

Published in Macroeconomic Dynamics, 2017, 21 (1), pp.259-277. ⟨10.1017/S1365100515000358⟩

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Related works:
Journal Article: 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)
Working Paper: Non-Separable Preferences do not Rule Out Aggregate Instability under Balanced-Budget Rules: A Note (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01505770

DOI: 10.1017/S1365100515000358

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