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Tax Policy and Aggregate Stability in an Overlapping Generations Model

Author

Listed:
  • Jang-Ting Guo

    (Department of Economics, University of California Riverside)

  • Yan Zhang

    (Zhongnan University of Economics and Law)

Abstract

In the context of a two-period non-monetary overlapping generations model with Cobb-Douglas preference and technological specifications, this paper explores the quantitative interrelations between equilibrium (in)determinacy versus (i) a progressive tax schedule on wage income and (ii) a balanced-budget rule with endogenous labor taxation. In sharp contrast to previous studies on a one-sector representative-agent macroeconomy, we find that both fiscal formulations are stabilizing instruments against cyclical fluctuations driven by agents' self-fulfilling beliefs. The key policy implication of our no-indeterminacy result is that depending on what is the underlying analytical environment, countercyclical income taxation may stabilize or destabilize the business cycle.

Suggested Citation

  • Jang-Ting Guo & Yan Zhang, 2021. "Tax Policy and Aggregate Stability in an Overlapping Generations Model," Working Papers 202112, University of California at Riverside, Department of Economics.
    • Handle: RePEc:ucr:wpaper:202112
    as

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    File URL: https://economics.ucr.edu/repec/ucr/wpaper/202112.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Galor, Oded, 1992. "A Two-Sector Overlapping-Generations Model: A Global Characterization of the Dynamical System," Econometrica, Econometric Society, vol. 60(6), pages 1351-1386, November.
    3. Lloyd-Braga, Teresa & Nourry, Carine & Venditti, Alain, 2007. "Indeterminacy in dynamic models: When Diamond meets Ramsey," Journal of Economic Theory, Elsevier, vol. 134(1), pages 513-536, May.
    4. Laitner, John & Stolyarov, Dmitriy, 2004. "Aggregate returns to scale and embodied technical change: theory and measurement using stock market data," Journal of Monetary Economics, Elsevier, vol. 51(1), pages 191-233, January.
    5. Schmitt-Grohe, Stephanie & Uribe, Martin, 1997. "Balanced-Budget Rules, Distortionary Taxes, and Aggregate Instability," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 976-1000, October.
    6. 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.
    7. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
    8. Guo, Jang-Ting & Lansing, Kevin J., 2009. "Capital-labor substitution and equilibrium indeterminacy," Journal of Economic Dynamics and Control, Elsevier, vol. 33(12), pages 1991-2000, December.
    9. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Tax Policy; Equilibrium Indeterminacy; Overlapping Generations Model.;
    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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