Balanced-budget rules and macroeconomic (in)stability

Abstract

It has been shown that under perfect competition and constant returns-to-scale, a onesector real business cycle model may exhibit indeterminacy and sunspots when income tax rates are determined by a balanced-budget rule with a pre-set level of government expenditures. This paper shows that indeterminacy disappears if the government finances endogenous public spending and transfers with fixed income tax rates. Under this type of balanced-budget formulation, the economy exhibits saddle-path stability and equilibrium uniqueness, regardless of the source of government revenue and/or the existence of lumpsum transfers.

Debt Stabilizing Fiscal Rules

“…Intuitively, it is clear that these three regions are not identical, since variations in g t leave the intertemporal accumulation equation (15) unaffected, while variations in η t and θ t+1 affect this equation through different margins, as to be inferred from (20) and (24). Second, it can be investigated whether there exists a particular debt targeting rule, characterized by a particular pair of π k and π b , which can be implemented under all instruments.…”

“…Moreover, reflecting the low level of debt, Figure 2 shares with Figure 1c the feature that the three regions have a common intersection. 20 Alternatively, Example 3 varies Example 1 by allowing for a more substantial increase in savings through structural factors (by further lowering α and by raising the savings rate via a higher value of β) as well as policy-related factors (by considering a tax-transfer system which shifts the tax burden more strongly to second period income). In sum, this leads to a substantially higher steady-state debt ratio of 0.14.…”

“…For a comparison of adjustment dynamics under a balanced primary budget and a time-varying unbalanced budget, stressing labour market aspects, see Kaas and von Thadden (2004). For further discussions of fiscal rules in overlapping generations models, see Marin (2002), closely related to the spirit of this paper, Schmitt-Grohé and Uribe (1997), Guo and Harrison (2004), and Giannitsarou (2004), all considering Ramsey economies with infinitely lived agents, show that for a given fiscal rule (in their context: a balanced-budget rule) equilibria can be locally unique or indeterminate, depending on whether budget balance is achieved by distortionary income taxes, consumption taxes or government spending adjustments. Our paper shares with these papers the descriptive nature of the fiscal rule, but our focus is not on balanced budget dynamics and the role of debt is substantially different.…”

Public Debt and Economic Growth in Uzawa’s Two-Sector Model With Public Goods

“…Lin's examination is focused on the effects of changes in some parameters on the steady state; while this study is focused on effects of changes in some parameters on the dynamic paths of the economic system as well as on the equilibrium point. Almost of all the recent theoretical literature of dynamic interactions between economic growth and public debts use either the Ramsey framework in continuous time (Cohen and Sachs, 1986;Blanchard and Fischer, 1989;Barro et al 1995;Semmler and Sieveking, 2000;Guo and Harrison, 2004;and Giannitsarou, 2007) or the OLG modeling framework in discrete time (Diamond, 1965;Farmer, 1986;Turnovsky and Sen, 1991;Azariadis, 1993;de la Croix and Michel, 2002;and Chalk, 2000). Different from the traditional approaches to household decision, this study uses Zhang's approach to household decision to re-examine the debt issues addressed by Diamond (1965).…”

Progressive taxation and macroeconomic (in)stability with utility-generating government spending

“…Finally, when h 2 ¼ / ¼ 0, our model collapses to one with useless government purchases and a constant income tax rate, as in Guo and Harrison (2004). In this formulation, it is straightforward to show that its Jacobian's determinant is negative, thus the eigenvalues of the log-linearized dynamical system (16) are of opposite signs and local determinacy always prevails.…”