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Indeterminacy with Progressive Taxation and Sector‐Specific Externalities
Author(s) -
Guo JangTing,
Harrison Sharon G.
Publication year - 2015
Publication title -
pacific economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.34
H-Index - 33
eISSN - 1468-0106
pISSN - 1361-374X
DOI - 10.1111/1468-0106.12106
Subject(s) - economics , externality , indeterminacy (philosophy) , business cycle , investment (military) , investment goods , consumption (sociology) , microeconomics , production (economics) , pigou effect , yield (engineering) , macroeconomics , social science , physics , materials science , quantum mechanics , sociology , politics , political science , metallurgy , law
This paper quantitatively examines the empirical plausibility of equilibrium indeterminacy and sunspot‐driven cyclical fluctuations in a real business cycle model with two distinct production sectors that yield consumption and investment goods, together with separable or non‐separable preferences. When calibrated to match the observed progressivity of the US federal individual income tax schedule, each version of our model economy exhibits an indeterminate steady state under empirically realistic combinations of the household's labour supply elasticity and the degree of productive externalities in the investment goods sector. Therefore, macroeconomic instability due to agents' self‐fulfilling expectations may, in fact, be a prevalent feature of the US economy.