Fiscal policy and fluctuations in a monetary model of growth (original) (raw)
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Government Debt, Fiscal Rules and Singular Growth Dynamics
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A fiscal rule controlling the government surplus as a function of the deviation of the actual debt ratio from a target level is introduced in an otherwise benchmark endogenous growth model in which productive government expenditures are financed by taxes and government debt. This generates a feedback mechanism from the government debt ratio to expenditure that can generate impasse-singular dynamics, in the sense that rates of growth can become locally infinitely valued. We characterize locally the different impasse-singular dynamics that can exist and discuss their consequences for the existence and characterization of general equilibrium endogenous growth paths, for different parameterizations of the fiscal rule. We present some consequences of impassesingular dynamics generated by particular fiscal rules, which are not present in regular models: existence of multiple overdeterminate balanced growth paths (BGP), existence of constraints in the domain of existence of determinate equilibrium paths converging to a regular BGP, and the existence of singular BGP's.
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In this paper we analyse the stabilisation properties of distortionary taxes in a New Keynesian model with overlapping generations of finitely-lived consumers. In this framework, government debt is part of net wealth and this adds a number of interesting channels through which fiscal policy could affect output and inflation. Output volatility, in presence of technology shocks, is not substantially affected by the operation of automatic stabilisers but we find interesting composition effects. While the presence of finitely-lived households strengthens the stabilisation performance of distortionary taxes through the reduction of the volatility of consumption, it does so at the cost of more volatile investment and real balances. These conflicting responses add up to a very small overall welfare losses associated with distortionary taxation.
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In an endogenous growth model where the fiscal authority cannot commit to policy decisions beyond the current period, we explore the time-consistent optimal choice for two policy instruments: the income tax rate and the split of government spending between utility bearing consumption and productive services to firms. We show that under the time-consistent Markov policy the economy lacks any transitional dynamics and there is local and global determinacy of equilibrium. For empirically plausible parameter values we find that the Markov-perfect policy implies a higher tax rate and a larger proportion of government spending allocated to consumption than those chosen under a commitment constraint. As a result, economic growth is slightly lower under the Markov-perfect policy than under the Ramsey policy, with growth under lump-sum taxes being highest. The implication of our results is that if the private sector is aware of the government’s inability to pledge future policy decisions, th...
Balanced Budget Rules and Aggregate Instability: The Role of Consumption Taxes
The Economic Journal, 2007
It is known that in a real business cycle model with constant returns to scale and a balanced budget fiscal policy rule, steady state indeterminacy may arise due to endogenous labour income tax rates. This article shows that when the government finances its expenditures via an endogenous consumption tax instead, a steady state is always saddle-path stable. Consequently, combining income taxes with consumption taxes makes the ranges of indeterminacy shrink, thus reducing the possibility of aggregate instability. From a policy perspective, the results provide an additional argument in favour of consumption taxes in place of capital taxes. * I am grateful to Jang-Ting Guo, Andrew Scott, Joseph Zeira and two anonymous referees for their comments and suggestions on improving this article. For various comments, I also thank seminar participants at the ECB,
Fiscal policy in a monetary economy with capital and finite lifetime
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This paper develops a dynamic stochastic general equilibrium model with nominal rigidities, capital accumulation and finite lifetimes. The framework exhibits intergenerational wealth effects and is intended to investigate the macroeconomic implications of fiscal policy, which is specified by either a debt-based tax rule or a balanced-budget rule allowing for temporary deficits. When calibrated to euro area quarterly data, the model
On Indeterminacy and Growth under Progressive Taxation and Utility-Generating Government Spending
Pacific Economic Review, 2017
We examine the theoretical interrelations between progressive income taxation and macroeconomic (in)stability in an otherwise standard one-sector AK model of endogenous growth with utility-generating government purchases of goods and services. In sharp contrast to traditional Keynesian-type stabilization policies, progressive taxation operates like an automatic destabilizer that generates equilibrium indeterminacy and belief-driven fluctuations in our endogenously growing macroeconomy. Unlike the no-sustained-growth counterpart, this instability result is obtained regardless of (i) the degree of the public-spending preference externality and (ii) whether private and public consumption expenditures are substitutes, complements or additively separable in the household's utility function.
Fiscal policy in more general equilibrium
1994
In this paper we examine the sensitivity of existing results in the equilibrium analysis of fiscal policy to assumptions about the slope of the long-run supply curve of capital. In the 'standard' model, based on the neoclassical growth model, the long-run supply of capital is perfectly elastic at the representative agent's fixed rate of time preference. This assumption is shown to have strong implications for the effects of government consumption purchases on output, employment, interest rates and other macroeconoruic variables. We explore the implications of relaxing this assumption in a more general model that allows for flexible time preference. We show that the multiplier effect of permanent changes in government purchases on output is enhanced, primarily as a result of increased capital accumulation. In an interesting Keynesian twist, private consumption may in fact rise in response to increased government purchases. I an endogenous time preference specification similar to ours in a real business cycle model. These sorts of preferences have also, quite naturally, shown up in the open economy macro literature, where for a small open economy fixity of time preference implies.an indeterminacy in the economy'. long-run debt position. The need to get away from fixed rates of time preference is here very clear and has been addressed, for example, by Mendoza [23].
Progressive Taxation and Macroeconomic (In)stability with Utility-Generating Government Spending
RePEc: Research Papers in Economics, 2013
We examine the theoretical interrelations between progressive income taxation and macroeconomic (in)stability in an otherwise standard one-sector real business cycle model with utility-generating government purchases of goods and services. When private and public consumption expenditures are complements in the household utility and the tax schedule is progressive, we analytically show that the economy exhibits indeterminacy and sunspots if and only if the degree of government-spending preference externality is higher than a critical threshold. Unlike traditional Keynesian-type stabilization policies, raising the tax progressivity may destabilize this version of our model by generating endogenous cyclical ‡uctuations. Moreover, the economy always displays saddle-path stability and equilibrium uniqueness under utility substitutability between private and public consumptions and progressive taxation.