Zhang, Yan and Chen, Yan (2009): Endogenous income taxes and indeterminacy in dynamic models: When Diamond meets Ramsey again.
Download (257kB) | Preview
This paper introduces fiscal increasing returns, through endogenous labor income tax rates as in Schmitt-Grohe and Uribe (1997), into the overlapping generations model with endogenous labor, consumption in both periods of life and homothetic preferences (e.g., Lloyd-Braga, Nourry and Venditti, 2007). We show that under numerical calibrations of the parameters, local indeterminacy can occur for distortionary tax rates that are empirically plausible for the U.S. economy, provided that the elasticity of capital-labor substitution and the wage elasticity of the labor supply are large enough, and the elasticity of intertemporal substitution in consumption is slightly greater than unity. These indeterminacy conditions are similar to those obtained within infinite horizon models and from this point of view, Diamond meets Ramsey again.
|Item Type:||MPRA Paper|
|Original Title:||Endogenous income taxes and indeterminacy in dynamic models: When Diamond meets Ramsey again.|
|Keywords:||Indeterminacy; Endogenous labor income tax rate.|
|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
|Depositing User:||Yan Zhang|
|Date Deposited:||01. Oct 2009 15:41|
|Last Modified:||21. Feb 2013 04:47|
J. Benhabib, R. Farmer, Indeterminacy and increasing returns, J. Econ. Theory 63 (1994) 19-41.
G. Cazzavillan, Indeterminacy and endogenous fluctuations with arbitrarily small externalities, J. Econ. Theory 101 (2001) 133-157.
G. Cazzavillan, P. Pintus, Robustness of multiple equilibria in OLG economies, Rev. Econ. Dynam. 7 (2004) 456-475.
G. Cazzavillan, P. Pintus, Capital externalities in OLG economies, J. Econ. Dynam. Control 30 (2006) 1215-1231.
Y. Chen, Y. Zhang, Endogenous income taxes in OLG economies, Mimeo, 2009a.
Y. Chen, Y. Zhang, Endogenous income taxes in OLG economies: A clarification, Mimeo, 2009b.
P. Diamond, National debt in a neoclassical growth model, Amer. Econ. Rev. 55 (1965) 1126-1150.
J. Duffy, C. Papageorgiou, A cross-country empirical investigation of the aggregate productionfunction specification, J. Econ. Growth 5 (2000) 87-120.
Y. Gokan, Dynamic effects of government budgetary policies in Reichlin's overlapping generations model with externalities, Mimeo, 2009a.
Y. Gokan, Macroeconomic Instability, government budgetary policy and overlapping generations economy, Mimeo, 2009b.
T. Lloyd-Braga, C. Nourry, A. Venditti, Indeterminacy in dynamic models: When Diamond meets Ramsey. J. Econ. Theory 134 (2007) 513-536.
P. Pintus, Indeterminacy with almost constant returns to scale: capital-labor substitution matters, Econ. Theory 28 (2006) 633-649.
P. Reichlin, Equilibrium cycles in an overlapping generations economy with production, J. Econ. Theory 40 (1986) 89-102.
S. Schmitt-Grohe, M. Uribe, Balanced-budget rule, distortionary taxes and aggregate instability, J. Polit. Econ. 105 (1997) 976-1000.