IDEAS home Printed from https://ideas.repec.org/a/mhr/finarc/urnsici0015-2218(200606)622_149iasoec_2.0.tx_2-o.html
   My bibliography  Save this article

Indeterminacy and Stabilization of Endogenous Cycles with Balanced-Budget Distortionary Taxation

Author

Listed:
  • Erkki Koskela
  • Mikko Puhakka

Abstract

We study the effects of distortionary labor taxation on endogenous cycles and the indeterminacy of equilibria in an overlapping-generations model with a balanced-budget rule. Under proportional taxation there is a critical tax rate above which cycles vanish, while with linearly progressive taxation there is a critical level of tax exemption below which cycles also vanish. If the utility function is quasilinear, increasing the tax rate can cause the economy to become determinate both with proportional and with linearly progressive taxation, whereas a sufficiently high tax exemption can make equilibrium indeterminate if the utility function is more general.

Suggested Citation

  • Erkki Koskela & Mikko Puhakka, 2006. "Indeterminacy and Stabilization of Endogenous Cycles with Balanced-Budget Distortionary Taxation," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 62(2), pages 149-167, June.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200606)62:2_149:iasoec_2.0.tx_2-o
    DOI: 10.1628/001522106X120631
    as

    Download full text from publisher

    File URL: https://www.mohrsiebeck.com/en/article/indeterminacy-and-stabilization-of-endogenous-cycles-with-balancedbudget-distortionary-taxation-101628001522106x120631
    Download Restriction: Fulltext access is included for subscribers to the printed version.
    File URL: https://libkey.io/10.1628/001522106X120631?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Goenka, Aditya, 1994. "Fiscal Rules and Extrinsic Uncertainty," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 401-416, May.
    2. Jang-Ting Guo & Sharon G. Harrison, 2001. "Tax Policy and Stability in a Model with Sector-Specific Externalities," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(1), pages 75-89, January.
    3. Gale, David, 1973. "Pure exchange equilibrium of dynamic economic models," Journal of Economic Theory, Elsevier, vol. 6(1), pages 12-36, February.
    4. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, vol. 53(5), pages 995-1045, September.
    5. Guo, Jang-Ting & Harrison, Sharon G., 2004. "Balanced-budget rules and macroeconomic (in)stability," Journal of Economic Theory, Elsevier, vol. 119(2), pages 357-363, December.
    6. Diamond, Peter A & Yaari, Menahem, 1972. "Implications of the Theory of Rationing for Consumer Choice Under Uncertainty," American Economic Review, American Economic Association, vol. 62(3), pages 333-343, June.
    7. Marta Aloi & Teresa Lloyd-Braga & Hans Jørgen Whitta-Jacobsen, 2003. "Endogenous business cycles and systematic stabilization policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(3), pages 895-915, August.
    8. Cass, David & Okuno, Masahiro & Zilcha, Itzhak, 1979. "The role of money in supporting the pareto optimality of competitive equilibrium in consumption-loan type models," Journal of Economic Theory, Elsevier, vol. 20(1), pages 41-80, February.
    9. Sijbren Cnossen & Hans-Werner Sinn (ed.), 2003. "Public Finance and Public Policy in the New Century," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262033046, April.
    10. Costas Azariadis & Roger Guesnerie, 1986. "Sunspots and Cycles," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(5), pages 725-737.
    11. Guo, Jang-Ting, 1999. "Multiple equilibria and progressive taxation of labor income," Economics Letters, Elsevier, vol. 65(1), pages 97-103, October.
    12. Grandmont, Jean-Michel, 1986. "Stabilizing competitive business cycles," Journal of Economic Theory, Elsevier, vol. 40(1), pages 57-76, October.
    13. Farmer, Roger E.A. & Woodford, Michael, 1997. "Self-Fulfilling Prophecies And The Business Cycle," Macroeconomic Dynamics, Cambridge University Press, vol. 1(4), pages 740-769, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Erkki Koskela & Mikko Puhakka, 2003. "Stabilizing Competitive Cycles with Distortionary Taxation," CESifo Working Paper Series 947, CESifo.
    2. Cazzavillan, Guido & Pintus, Patrick A., 2005. "On competitive cycles and sunspots in productive economies with a positive money stock," Research in Economics, Elsevier, vol. 59(2), pages 137-147, June.
    3. Guo, Jang-Ting & Lansing, Kevin J., 2002. "Fiscal Policy, Increasing Returns, And Endogenous Fluctuations," Macroeconomic Dynamics, Cambridge University Press, vol. 6(5), pages 633-664, November.
    4. Koskela, Erkki & Puhakka, Mikko, 2007. "Stone-Geary preferences in overlapping generations economies under pure exchange: A note," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 976-982, December.
    5. Fukuda, Shin-ichi, 1998. "Sunspot equilibria and periodic cycles under idiosyncratic uncertainty," Journal of Economic Behavior & Organization, Elsevier, vol. 36(1), pages 127-138, July.
    6. Lahiri, Amartya & Puhakka, Mikko, 1998. "Habit Persistence in Overlapping Generations Economies under Pure Exchange," Journal of Economic Theory, Elsevier, vol. 78(1), pages 176-186, January.
    7. Kaas, Leo & Madden, Paul, 2005. "Imperfectly competitive cycles with Keynesian and Walrasian features," European Economic Review, Elsevier, vol. 49(4), pages 861-886, May.
    8. Ohtaki, Eisei, 2014. "Tractable graphical device for analyzing stationary stochastic OLG economies," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 16-26.
    9. Michener, Ronald & Ravikumar, B., 1998. "Chaotic dynamics in a cash-in-advance economy," Journal of Economic Dynamics and Control, Elsevier, vol. 22(7), pages 1117-1137, May.
    10. Puhakka, Mikko, 2004. "Equilibrium dynamics under lump-sum taxation in an exchange economy with skewed endowments," Bank of Finland Research Discussion Papers 29/2004, Bank of Finland.
    11. Erkki Koskela & Mikko Puhakka, 2006. "Cycles and Indeterminacy in Overlapping Generations Economies with Stone-Geary Preferences," CESifo Working Paper Series 1737, CESifo.
    12. Austin, D. Andrew, 1999. "Social Security as an Economic Stabilization Program," Journal of Macroeconomics, Elsevier, vol. 21(2), pages 309-333, April.
    13. Tvede Mich, 2009. "Fluctuations in Overlapping Generations Economies," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-19, May.
    14. Farmer, Roger E.A. & Zabczyk, Pawel, 2018. "The household fallacy," Economics Letters, Elsevier, vol. 169(C), pages 83-86.
    15. Mark Pingle & Leigh Tesfatsion, 1993. "``Active Intermediation in a Monetary Overlapping Generations Economy''," Macroeconomics 9312001, University Library of Munich, Germany, revised 04 Dec 1993.
    16. Puhakka, Mikko, 2005. "The effects of aging population on the sustainability of fiscal policy," Research Discussion Papers 26/2005, Bank of Finland.
    17. Takuma Kunieda & Akihisa Shibata, 2014. "Credit Market Imperfections and Macroeconomic Instability," Pacific Economic Review, Wiley Blackwell, vol. 19(5), pages 592-611, December.
    18. Aditya Goenka & Saqib Jafarey & William Pouliot, 2012. "Pollution, Mortality and Optimal Environmental Policy," Discussion Papers 12-05, Department of Economics, University of Birmingham.
    19. Aloi, Marta & Lasselle, Laurence, 2007. "Growth and welfare effects of stabilizing innovation cycles," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 806-823, December.
    20. Chiappori, P. A. & Davila, J., 1996. "Cycles and sunspot: The Poincare-Hopf approach," Journal of Mathematical Economics, Elsevier, vol. 26(3), pages 269-284.

    More about this item

    Keywords

    overlapping generations; endogenous cycles; proportional and progressive taxes; indeterminacy;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mhr:finarc:urn:sici:0015-2218(200606)62:2_149:iasoec_2.0.tx_2-o. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Thomas Wolpert (email available below). General contact details of provider: https://www.mohrsiebeck.com/fa .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.