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Balanced-Budget Rules and Aggregate Stability

Ghilardi, Matteo and Rossi, Raffaele (2011) Balanced-Budget Rules and Aggregate Stability. Working Paper. UNSPECIFIED.

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Abstract

t has been shown that under perfect competition and a Cobb-Douglas production function, a basic real business cycle model may exhibit indeterminacy and sunspots fluctuations when income tax rates are determined by a balanced-budget rule. This paper introduces in an otherwise standard real business cycle model a more general and data coherent class of production functions, namely a constant elasticity of substitution production function. We show that the degree of substitutability between production factors is a key ingredient to understand the (de)stabilising properties of a balanced-budget rule. Furthermore, when we calibrate the model consistently with the empirical evidence, i.e. the elasticity of substitutions between labour and capital below unity, balanced-budget rules deliver determinacy for a broad range of OECD countries.

Item Type: Monograph (Working Paper)
Subjects: H Social Sciences > HB Economic Theory
Departments: Lancaster University Management School > Economics
ID Code: 60042
Deposited By: ep_importer_pure
Deposited On: 16 Nov 2012 13:25
Refereed?: No
Published?: Published
Last Modified: 10 Apr 2014 02:43
Identification Number:
URI: http://eprints.lancs.ac.uk/id/eprint/60042

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