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Aggregate instability under balanced-budget consumption taxes: a re-examination

Carine Nourry, Thomas Seegmuller () and Alain Venditti ()

Working Papers 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, and assuming that preferences are of the Greenwood-Hercovitz-Huffman [8] (GHH) type, we show that non-linear consumption taxation may destabilize the economy, promoting expectation-driven fluctuations, if the tax rate is counter-cyclical. We also exhibit a Laffer curve, which explains the multiplicity of steady states when the tax rate is counter-cyclical. All these results are mainly driven by the absence of income effect. Finally, a numerical illustration shows that consumption taxation may be a source of instability for most OECD countries.

Keywords: Indeterminacy; endogenous business cycles; consumption taxes; balanced-budget rule; infinite-horizon model (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-dge and nep-mac
Date: 2011-10-19
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00633609
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Journal Article: Aggregate instability under balanced-budget consumption taxes: A re-examination (2013) Downloads
Working Paper: Aggregate instability under balanced-budget consumption taxes: A re-examination (2013)
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