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Time‐varying consumption tax, productive government spending, and aggregate instability

Abstract : In this paper we investigate if government balanced-budget rules together with endogenous taxation may lead to aggregate instability in an endogenous growth framework. After highlighting the differences with the exogenous growth framework, we prove that under counter-cyclical consumption taxes, while there exists a unique balanced growth path, sunspot equilibria based on self-fulfilling expectations occur through a form of global indeterminacy. In addition, we argue that this result is empirically plausible for a large set of OECD countries and that it may also emerge with endogenous income taxes.
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Submitted on : Monday, January 3, 2022 - 1:23:25 PM
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Mauro Bambi, Alain Venditti. Time‐varying consumption tax, productive government spending, and aggregate instability. International Journal of Economic Theory, Wiley, 2019, 17 (2), pp.190-215. ⟨10.1111/ijet.12216⟩. ⟨hal-02478346⟩

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