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Alternative government financing and aggregate fluctuations driven by self-fulfilling expectations. (English) Zbl 1181.91194

Summary: Using Woodford’s finance-constrained model [M. Woodford, J. Econ. Theory 40, 128–137 (1986; Zbl 0602.90038)] with external effects in production as in [J.-P. Barinci and A. Chéron, J. Econ. Theory 97, No. 1, 30–49 (2001; Zbl 1013.91083)], this paper investigates the effects of alternative government financing methods on the range of values of increasing returns leading to an indeterminate steady state. It will be shown that indeterminacy may easily arise at a wide range of values of increasing returns if constant government expenditure is financed through labor income taxes, and with difficulty if constant government expenditure is financed by taxes on capital. In addition, we explore how the consequences of endogenous income taxes are changed if tax rates on labor and capital income are kept constant and government expenditure is endogenously adjusted to satisfy the budget constraint.

MSC:

91B64 Macroeconomic theory (monetary models, models of taxation)
91B55 Economic dynamics
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