Destabilizing balanced‐budget consumption taxes in multi‐sector economies. (8th April 2013)

• Record Type: Journal Article
• Authors: Nishimura, Kazuo; Nourry, Carine; Seegmuller, Thomas; Venditti, Alain
• Is Part Of: International journal of economic theory. Volume 9:Number 1(2013:Mar.)
• Page Start: 113
• Page End: 130
• Publication Date: 2013-04-08
• Subjects: aggregate instability -- indeterminacy -- expectations‐driven fluctuations -- consumption taxes -- balanced‐budget rule -- infinite‐horizon two‐sector model; Economics -- Periodicals; 330.01
• DOI: 10.1111/j.1742-7363.2013.12008.x
• Languages: English
• ISSNs: 1742-7355

Abstract

Abstract: We examine the impact of balanced‐budget consumption taxes on the existence of expectations‐driven business cycles in two‐sector economies with infinitely lived households. We prove that, whatever the relative capital intensity difference across sectors, aggregate instability can occur if the consumption tax rate is not too low. Moreover, we show through a numerical exercise based on empirically plausible tax rates that endogenous business‐cycle fluctuations may be a source of instability for all OECD countries, including the US.