Aggregate Stability and Balanced-Budget Rules
Matteo Ghilardi () and
Raffaele Rossi ()
No 411, School of Economics Discussion Papers from School of Economics, University of Surrey
It has been shown that under perfect competition and a Cobb-Douglas production function, a basic real business cycle model may exhibit indeterminacy and sunspots fluctuations when income tax rates are determined by a balanced-budget rule. This paper introduces in an otherwise standard real business cycle model a more general and data coherent class of production functions, namely a constant elasticity of substitution production function. We show that the degree of substitutability between production factors is a key ingredient to understand the (de)stabilising properties of a balanced-budget rule. Furthermore, when we calibrate the model consistently with the empirical evidence, i.e. the elasticity of substitutions between labour and capital below unity, balanced-budget rules deliver determinacy for a broad range of OECD countries.
Keywords: Constant Elasticity of Substitution; Balanced-Budget Rules; Indeterminacy; Business Cycles (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
Pages: 23 pages
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Journal Article: Aggregate Stability and Balanced‐Budget Rules (2014)
Working Paper: Aggregate Stability and Balanced-Budget Rules (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:sur:surrec:0411
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