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Aggregate instability under balanced-budget consumption taxes: A re-examination

Abstract : We re-examine the destabilizing role of balanced-budget fiscal policy rules based on consumption taxation. Using a one-sector model with infinitely-lived households, we consider a specification of preferences derived from Jaimovich (2008) [14] and Jaimovich and Rebelo (2009) [15] which is flexible enough to encompass varying degrees of income effect. When the income effect is not too large, we show that there exists a Laffer curve, which explains the multiplicity of steady states, and that non-linear consumption taxation may destabilize the economy, promoting expectation-driven fluctuations, if the elasticity of intertemporal substitution in consumption is sufficiently larger than one and the tax rate is counter-cyclical with respect to consumption. Numerical illustrations also show that consumption taxation may be a source of instability for most OECD countries for a wide range of structural parametersʼ configurations. We finally prove the robustness of our conclusions if we consider a discrete-time setup.
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Contributor : Elisabeth Lhuillier Connect in order to contact the contributor
Submitted on : Monday, April 3, 2017 - 5:13:10 PM
Last modification on : Saturday, June 25, 2022 - 11:25:58 PM

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Carine Nourry, Thomas Seegmuller, Alain Venditti. Aggregate instability under balanced-budget consumption taxes: A re-examination. Journal of Economic Theory, Elsevier, 2013, 148 (5), pp.1977-2006. ⟨10.1016/j.jet.2013.07.010⟩. ⟨hal-01500883⟩



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