Hostname: page-component-78c5997874-dh8gc Total loading time: 0 Render date: 2024-11-14T01:25:20.888Z Has data issue: false hasContentIssue false
  • English
  • Français

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: [email protected].
Get access Rights & Permissions [Opens in a new window]

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 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Campbell, John (1999) Asset prices, consumption and the business cycle. In Taylor, John B. and Woodford, Michael (eds.), Handbook of Macroeconomics, pp. 1231–1303. Amsterdam: North-Holland.Google Scholar
Duffy, John and Papageorgiou, Chris (2000) A cross-country empirical investigation of the aggregate production function specification. Journal of Economic Growth 5, 87–120.CrossRefGoogle Scholar
Ghilardi, Matteo and Rossi, Raffaele (2014) Aggregate stability and balanced-budget rules. Journal of Money, Credit and Banking 46, 1785–1807.Google Scholar
Greenwood, Jeremy, Hercovitz, Zvi, and Huffman, Gregory (1988) Investment, capacity utilization and the real business cycle. American Economic Review 78, 402–417.Google Scholar
Gruber, Jonathan (2013) A tax-based estimate of the elasticity of intertemporal substitution. Quarterly Journal of Finance 3, 1–20.Google Scholar
Guo, Jang-Ting and Harrison, Sharon (2004) Balanced-budget rules and macroeconomic (in)stability. Journal of Economic Theory 119, 357–363.Google Scholar
Guo, Jang-Ting and Lansing, Kevin (1998) Indeterminacy and stabilization policy. Journal of Economic Theory 82, 481–490.Google Scholar
Jaimovich, Nir and Rebelo, Sergio (2008) Can news about the future drive business cycles? American Economic Review 99, 1097–1118.Google Scholar
Karagiannis, Giannis, Palivos, Theodore, and Papageorgiou, Chris (2005) Variable elasticity of substitution and economic growth: Theory and evidence. In Diebold, Claude and Kyrtsou, C. (eds.), New Trends in Macroeconomics, pp. 21–37. Heidelberg, Germany: Springer.Google Scholar
Khan, Hashmat and Tsoukalas, John (2011) Investment shocks and the comovement problem. Journal of Economic Dynamics and Control 35, 115–130.Google Scholar
King, Robert, Plosser, Charles, and Rebelo, Sergio (1988) Production, growth and business cycles II: New directions. Journal of Monetary Economics 21, 309–341.Google Scholar
Klump, Rainer, McAdam, Peter, and Willman, Alpo (2007) The long-term success of the neoclassical growth model. Oxford Review of Economic Policy 23, 94–114.Google Scholar
Klump, Rainer, McAdam, Peter, and Willman, Alpo (2012) The normalized CES production function—Theory and empirics. Journal of Economic Surveys 26, 769–799.Google Scholar
Kocherlakota, Narayana (1996) The equity premium: It's still a puzzle. Journal of Economic Literature 36, 42–71.Google Scholar
Lane, Philip (2003) The cyclical behaviour of fiscal policy: Evidence from the OECD. Journal of Public Economics 87, 2661–2675.Google Scholar
León-Ledesma, Miguel, McAdam, Peter, and Willman, Alpo (2010) Identifying the elasticity of substitution with biased technical change. American Economic Review 100, 1330–1357.Google Scholar
Linnemann, Ludger (2008) Balanced budget rules and macroeconomic stability with non-separable utility. Journal of Macroeconomics 30, 199–215 Google Scholar
MacAdam, Peter and Willman, Alpo (2013) Medium run redux. Macroeconomic Dynamics 17, 695–727.CrossRefGoogle Scholar
Mulligan, Casey (2002) Capital Interest and Aggregate Intertemporal Substitution. NBER working paper 9373.Google Scholar
Piketty, Thomas and Zucman, Gabriel (2014) Capital is back: Wealth–income ratio in rich countries 1700–2010. Quarterly Journal of Economics 129, 1255–1310.Google Scholar
Rogerson, Richard and Wallenius, Johanna (2009) Micro and macro elasticities in a life cycle model with taxes. Journal of Economic Theory 144, 2277–2292.Google Scholar
Schaechter, Andrea, Kinda, Tidiane, Budina, Nina, and Weber, Anke (2012) Fiscal Rules in Response to the Crisis. IMF working paper 12/187.Google Scholar
Schmitt-Grohé, Stephanie and Uribe, Martin (1997) Balanced-budget rules, distortionary taxes, and aggregate instability. Journal of Political Economy 105, 976–1000.Google Scholar
Trabandt, Mathias and Uhlig, Harald (2011) The Laffer curve revisited. Journal of Monetary Economics 58, 305–327.Google Scholar
Vissing-Jorgensen, Annette and Attanasio, Orazio (2003) Stock-market participation, intertemporal substitution and risk aversion. American Economic Review Papers and Proceedings 93, 383–391.Google Scholar