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Procyclical endogenous taxation and aggregate instability

Mauro Bambi () and Siritas Kettanurak

Discussion Papers from Department of Economics, University of York

Abstract: The existing contributions on endogenous taxation, and balanced budget rules, suggest that countercyclical taxes should be avoided, because they may lead to aggregate instability (i.e. sunspot equilibria); on the other hand, procyclical taxes have always been praised for their stabilizing role. In this paper, we re-examine this issue in an endogenous growth model with productive government investment, and we prove that an economy with procyclical taxes, and a sufficiently large income effect, can still be characterized by i) global indeterminacy because two balanced growth paths may exist; ii) aggregate instability around the balanced growth path with the lowest growth rate. Finally, we show that this dynamics may emerge for reasonable choices of the parameters.

Keywords: Endogenous growth; time-varying consumption tax; local and global indeterminacy. (search for similar items in EconPapers)
JEL-codes: C62 E32 H20 O41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-gro, nep-mac and nep-pbe
Date: 2017-10
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