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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, 2008. "Balanced-Budget Rule, distortionary taxes and Aggregate Instability: A Comment," Working Papers hal-04140707, HAL.
    • Handle: RePEc:hal:wpaper:hal-04140707
    Note: View the original document on HAL open archive server: https://hal.science/hal-04140707
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    References listed on IDEAS

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    1. Basu, Susanto & Fernald, John G., 1995. "Are apparent productive spillovers a figment of specification error?," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 165-188, August.
    2. Hartl, Richard F., 1987. "A simple proof of the monotonicity of the state trajectories in autonomous control problems," Journal of Economic Theory, Elsevier, vol. 41(1), pages 211-215, February.
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