Nonseparable preferences do not rule out aggregate instability under balanced-budget rules: a note - Aix-Marseille Université Access content directly
Journal Articles Macroeconomic Dynamics Year : 2017

Nonseparable preferences do not rule out aggregate instability under balanced-budget rules: a note

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.

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Dates and versions

hal-01505770 , version 1 (11-04-2017)

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Nicolas Abad, Thomas Seegmuller, Alain Venditti. Nonseparable preferences do not rule out aggregate instability under balanced-budget rules: a note. Macroeconomic Dynamics, 2017, 21 (1), pp.259-277. ⟨10.1017/S1365100515000358⟩. ⟨hal-01505770⟩
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