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NONSEPARABLE PREFERENCES DO NOT RULE OUT AGGREGATE INSTABILITY UNDER BALANCED-BUDGET RULES: A NOTE

Published online by Cambridge University Press:  28 January 2016

Nicolas Abad ,
Thomas Seegmuller  and
Alain Venditti
Nicolas Abad
Affiliation:
Aix-Marseille University (Aix-Marseille School of Economics)–CNRS–EHESS
Thomas Seegmuller
Affiliation:
Aix-Marseille University (Aix-Marseille School of Economics)–CNRS–EHESS
Alain Venditti*
Affiliation:
Aix-Marseille University (Aix-Marseille School of Economics)–CNRS–EHESS and EDHEC Business School
*
Address correspondence to: Alain Venditti, GREQAM, 2 rue de la Charité, 13002 Marseille, France; e-mail: alain.venditti@univ-amu.fr.
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Abstract

We investigate the role of nonseparable preferences in the occurrence of macroeconomic instability under a balanced-budget rule where government spending is financed by a tax on labor income. Considering a one-sector neoclassical growth model with a large class of nonseparable utility functions, we find that expectations-driven fluctuations occur easily when consumption and labor are Edgeworth substitutes or weak Edgeworth complements. Under these assumptions, an intermediate range of tax rates and a sufficiently low elasticity of intertemporal substitution in consumption lead to instability.

Keywords

IndeterminacyExpectations-driven Business CyclesLabor Income TaxesBalanced-Budget RuleNonseparable Preferences
Type
Notes
Information
Macroeconomic Dynamics , Volume 21 , Issue 1 , January 2017 , pp. 259 - 277
Copyright
Copyright © Cambridge University Press 2016 

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