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Indeterminacy And Period Length Under Balanced Budget Rules

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  • Anagnostopoulos, Alexis
  • Giannitsarou, Chryssi

Abstract

We analyze the importance of the frequency of decision making for macroeconomic dynamics, in the context of a simple, well-known business cycle model with balanced budget rules. We explain how the frequency of decision making (period length) and the measurement unit of time (calibration frequency) differ and examine how local stability is affected by changes in the period length. We find that as the period grows longer, indeterminacy occurs less often. This may have significant quantitative implications: for the model at hand, there is a wide range of economically relevant labor tax rates (from 30% to 38%) for which the continuous-time model gives indeterminacy, whereas the discrete-time model has determinate dynamics.

Suggested Citation

  • Anagnostopoulos, Alexis & Giannitsarou, Chryssi, 2013. "Indeterminacy And Period Length Under Balanced Budget Rules," Macroeconomic Dynamics, Cambridge University Press, vol. 17(4), pages 898-919, June.
    • Handle: RePEc:cup:macdyn:v:17:y:2013:i:04:p:898-919_00
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    Cited by:

    1. Xue, Jianpo & Yip, Chong K., 2018. "Home production, balanced-budget taxation and economic (in)stability," Journal of Macroeconomics, Elsevier, vol. 56(C), pages 231-242.
    2. Yan Zhang, 2021. "Income effects, stabilization policy, and indeterminacy in one-sector models," Annals of Economics and Finance, Society for AEF, vol. 22(1), pages 109-133, May.
    3. Nourry, Carine & Seegmuller, Thomas & Venditti, Alain, 2013. "Aggregate instability under balanced-budget consumption taxes: A re-examination," Journal of Economic Theory, Elsevier, vol. 148(5), pages 1977-2006.
    4. Abad, Nicolas & Venditti, Alain, 2021. "A Note On Balanced-Budget Income Taxes And Aggregate (In)Stability In Multi-Sector Economies," Macroeconomic Dynamics, Cambridge University Press, vol. 25(3), pages 824-843, April.
    5. Kevin x.d. Huang & Qinglai Meng & Jianpo Xue, 2019. "Capital Income Taxation and Aggregate Instability," Vanderbilt University Department of Economics Working Papers 19-00007, Vanderbilt University Department of Economics.
    6. Huang, Kevin X.D. & Meng, Qinglai & Xue, Jianpo, 2017. "Balanced-budget income taxes and aggregate stability in a small open economy," Journal of International Economics, Elsevier, vol. 105(C), pages 90-101.
    7. Kevin X.D. Huang & Qinglai Meng & Jianpo Xue, 2019. "Capital Income Taxation and Aggregate Instability," Vanderbilt University Department of Economics Working Papers 19-00007, Vanderbilt University Department of Economics.
    8. Kevin X.D. Huang & Qinglai Meng & Jianpo Xue, 2018. "Balanced‐Budget Rules and Aggregate Instability: The Role of Endogenous Capital Utilization," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(8), pages 1669-1709, December.

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