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Nonseparable preferences do not rule out aggregate instability under balanced-budget rules: a note

Abstract : We investigate the role of nonseparable preferences in the occurrence of macroeconomic instability under a balanced-budget rule where government spending is financed by a tax on labor income. Considering a one-sector neoclassical growth model with a large class of nonseparable utility functions, we find that expectations-driven fluctuations occur easily when consumption and labor are Edgeworth substitutes or weak Edgeworth complements. Under these assumptions, an intermediate range of tax rates and a sufficiently low elasticity of intertemporal substitution in consumption lead to instability.
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https://hal-amu.archives-ouvertes.fr/hal-01505770
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Submitted on : Tuesday, April 11, 2017 - 5:56:15 PM
Last modification on : Wednesday, April 27, 2022 - 2:42:02 PM

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Nicolas Abad, Thomas Seegmuller, Alain Venditti. Nonseparable preferences do not rule out aggregate instability under balanced-budget rules: a note. Macroeconomic Dynamics, 2017, 21 (1), pp.259-277. ⟨10.1017/S1365100515000358⟩. ⟨hal-01505770⟩

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