Dynamic effects of government expenditure in a finance constrained economy: A Note

Chen, Yan and Zhang, Yan (2009): Dynamic effects of government expenditure in a finance constrained economy: A Note.

Abstract

Gokan [Dynamic effects of government expenditure in a finance constrained economy, J. Econ. Theory 127 (2006) 323-333] introduces constant government expenditure (financed by labor income taxes) in Woodford's model with capital-labor substitution and investigates how local dynamics near two steady states depend upon the elasticity of substitution between capital and labor. In this paper, we show that the local dynamics will change dramatically if the government transfers its revenue to the households (workers) in a lump sum way. In particular, we question the result that the rate of money growth has no impact on the model dynamics. In a numerical example, we illustrate that the result previously obtained is not robust to the alternative assumption.

• Item Type: MPRA Paper
• Language: English
• Keywords: a lump sum transfer; indeterminacy.
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C62 - Existence and Stability Conditions of Equilibrium

References

Gokan Y. (2006) Dynamic effects of government expenditure in a finance constrained economy. Journal of Economic Theory 127, 323--333.

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Woodford M. (1986) Stationary sunspot equilibria in a finance constrained economy. Journal of Economic Theory 40, 128--137.