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Balanced-budget consumption taxes and aggregate stability in a small open economy

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  • Meng, Qinglai
  • Xue, Jianpo

Abstract

In a small open economy facing a perfect world capital market, this paper shows that if the government follows a balanced-budget fiscal policy based on endogenous consumption tax rates, then the steady state is saddle-path stable and hence beliefs-driven aggregate instability can be ruled out. This result is in contrast to those obtained in some closed economy models, and it suggests that unrestricted world capital mobility can help stabilize the economy under the balanced-budget fiscal policy based on consumption taxation.

Suggested Citation

  • Meng, Qinglai & Xue, Jianpo, 2015. "Balanced-budget consumption taxes and aggregate stability in a small open economy," Economics Letters, Elsevier, vol. 137(C), pages 214-217.
    • Handle: RePEc:eee:ecolet:v:137:y:2015:i:c:p:214-217
    DOI: 10.1016/j.econlet.2015.11.003
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    References listed on IDEAS

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    Citations

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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. Zhiming Fu & Antoine Le Riche, 2021. "Progressive consumption tax and monetary policy in an endogenous growth model," Journal of Economics, Springer, vol. 133(3), pages 271-293, August.
    3. David R. Stockman, 2022. "Balanced‐budget rules: Local indeterminacy and bifurcations," International Journal of Economic Theory, The International Society for Economic Theory, vol. 18(2), pages 109-136, June.
    4. Le Riche, Antoine, 2022. "Balanced-budget fiscal rules and money growth pegging," Journal of Macroeconomics, Elsevier, vol. 73(C).
    5. Micheli, Martin, 2020. "Aggregate stability under a budget rule and labor mobility," Economic Modelling, Elsevier, vol. 93(C), pages 510-519.
    6. Gerasimos T. Soldatos, 2021. "In/Estabilidad bajo el impuesto sobre la renta ideal y el impuesto sobre el consumo ideal," Cuadernos de Economía - Spanish Journal of Economics and Finance, Asociación Cuadernos de Economía, vol. 44(124), pages 33-42, Enero.
    7. Liutang Gong & Wei Wang, 2020. "Self‐fulfilling patience," Australian Economic Papers, Wiley Blackwell, vol. 59(4), pages 336-357, December.
    8. Fujisaki, Seiya, 2016. "Aggregate Stability in Monetary Economy with Consumption Tax and Taylor Rule," MPRA Paper 69833, University Library of Munich, Germany.

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    More about this item

    Keywords

    Balanced-budget rules; Consumption taxes; Small open economy; Indeterminacy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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