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

Bambi, Mauro; Venditti, Alain

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.

Citation

Bambi, M., & Venditti, A. (2021). Time‐varying consumption tax, productive government spending, and aggregate instability. International Journal of Economic Theory, 17(2), 190-215. https://doi.org/10.1111/ijet.12216

• Journal Article Type: Article
• Acceptance Date: Nov 24, 2018
• Online Publication Date: Apr 1, 2019
• Publication Date: May 14, 2021
• Deposit Date: Apr 24, 2019
• Publicly Available Date: Apr 24, 2019
• Journal: International Journal of Economic Theory
• Print ISSN: 1742-7355
• Electronic ISSN: 1742-7363
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 17
• Issue: 2
• Pages: 190-215
• DOI: https://doi.org/10.1111/ijet.12216
• Public URL: https://durham-repository.worktribe.com/output/1332383