Aggregate instability under balanced-budget consumption taxes: A re-examination - Archive ouverte HAL Access content directly
Journal Articles Journal of Economic Theory Year : 2013

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

(1, 2) , (1) , (1, 3)
1
2
3

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.

Dates and versions

hal-01500883 , version 1 (03-04-2017)

Identifiers

Cite

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

Altmetric

Share

Gmail Facebook Twitter LinkedIn More