Public Spending as a Source of Endogenous Business Cycles in a Ramsey Model With Many Agents

Abstract

We introduce public spending, financed through income taxation, in the Ramsey model with heterogeneous agents. Public spending as a source of welfare generates more complex dynamics. In contrast to previous contributions focusing on similar models but with wasteful public spending, limit cycles through Hopf bifurcation and expectation-driven fluctuations appear if the degree of capital-labor substitution is large enough to be compatible with capital income monotonicity. Moreover, unlike frameworks with a representative agent, our results do not require externalities in production and are compatible with a weakly elastic labor supply with respect to wage.JEL classification: C62, E32, H23.

On the (de)stabilizing effect of public debt in a Ramsey model with heterogeneous agents

“…Nishimura et al . () have recently exhibited the existence of endogenous fluctuations through the occurrence of local indeterminacy in a similar Ramsey model with government spending financed by linear income taxes but without public debt and augmented to include endogenous labor.…”

“…Our aim is to show that, since public spending externalities affect utility of consumption, endogenous business cycles can occur in the Ramsey model with heterogeneous agents for any value of the elasticity of capital-labor substitution, and in particular even in the case where capital income monotonicity holds. Nishimura et al (2013) have recently exhibited the existence of endogenous fluctuations through the occurrence of local indeterminacy in a similar Ramsey model with government spending financed by linear income taxes but without public debt and augmented to include endogenous labor.…”

“…See alsoSorger (1994) for the existence of more complex dynamics. 2 InNishimura et al (2013), the existence of endogenous fluctuations through the occurrence of local indeterminacy is analyzed in a Ramsey model with government spending, financed from a constant income tax only, and endogenous labor.…”