Ghilardi, Matteo and Rossi, Raffaele (2011) Balanced-Budget Rules and Aggregate Stability. Working Paper. UNSPECIFIED.Full text not available from this repository.
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|
|Deposited On:||16 Nov 2012 13:25|
|Last Modified:||16 Nov 2012 13:25|
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