Consolidated-Budget Rules and Macroeconomic Stability with Income-Tax and Finance Constraints

Baruch Gliksberg

MPRA Paper from University Library of Munich, Germany

Abstract: In some Business-Cycle models a fiscal policy that sets income taxes counter cyclically can cause macroeconomic instability by giving rise to multiple equilibria and as a result to fluctuations caused by self fulfilling expectations. This paper shows that consolidated budget rules with endogenous income-tax rates can be stabilizing if they exhibit monetary dominance, where monetary policy manages expectations by implementing an active interest rate rule. This result is robust for plausible degrees of externalities in production. The size of the government, however, plays a key role in the degree of activeness that the monetary authority should exhibit in order to stabilize the economy. If government spending are not too large relative to private consumption, a neutral monetary policy [such that the real rate of interest is constant in and off the steady state] is also stabilizing

Keywords: Fiscal Policy; Capital-Income Tax; Monetary Policy; Macroeconomic Stabilization; Finance Constraint; Arbitrage Channel; Investment-Based Channel; Consumption-Based Channel (search for similar items in EconPapers)
JEL-codes: E0 E61 E62 (search for similar items in EconPapers)
Date: 2010-07
New Economics Papers: this item is included in nep-acc, nep-cba, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/24817/1/MPRA_paper_24817.pdf original version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:24817

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().