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Balanced-Budget Rule, distortionary taxes and Aggregate Instability: A Comment

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  • Aurélien Saïdi

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

Abstract

It has been shown that under perfect competition and constant returns-to-scale, a one-sector growth model may exhibit local indeterminacy when income tax rates are endogenously determined by a balanced-budget rule while government expendi- tures are fixed. This paper shows that the associated aggregate instability does not ensue from the local indeterminacy of a specific stationary equilibrium but from the multiplicity of the stationary equilibria and persists under local determinacy of all of them. We provide a global analysis of the Schmitt-Grohe and Uribe model [1997] and study specific cases that were not investigated in the original paper, when aggregate instability is inherited from the coexistence of two saddle-path equilibria on one hand and from the connection of the two steady states on the other hand.

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  • Aurélien Saïdi, 2011. "Balanced-Budget Rule, distortionary taxes and Aggregate Instability: A Comment," Post-Print hal-04140707, HAL.
    • Handle: RePEc:hal:journl:hal-04140707
    Note: View the original document on HAL open archive server: https://hal.science/hal-04140707v1
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    References listed on IDEAS

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    2. Blanchard, Olivier J. & Summers, Lawrence H., 1987. "Fiscal increasing returns, hysteresis, real wages and unemployment," European Economic Review, Elsevier, vol. 31(3), pages 543-560, April.
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