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

Mauro Bambi (1) , Alain Venditti (2, 3)

1 Durham University
2 AMSE - Aix-Marseille Sciences Economiques
3 EDHEC - EDHEC Business School

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.

Mots clés: endogenous growth; time‐varying consumption tax; global indeterminacy; self‐fulfilling expectation; sunspot equilibria

Domaines: Economies et finances

Mauro Bambi, Alain Venditti. Time‐varying consumption tax, productive government spending, and aggregate instability. International Journal of Economic Theory, 2019, 17 (2), pp.190-215. ⟨10.1111/ijet.12216⟩. ⟨hal-02478346⟩