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On Indeterminacy and Growth under Progressive Taxation and Utility‐Generating Government Spending
Author(s) -
Chen ShuHua,
Guo JangTing
Publication year - 2018
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 - 10.1111/1468-0106.12210
Subject(s) - economics , indeterminacy (philosophy) , consumption (sociology) , externality , endogenous growth theory , government spending , new keynesian economics , preference , microeconomics , government (linguistics) , private consumption , private good , consumption function , public good , keynesian economics , production (economics) , fiscal policy , welfare , monetary policy , market economy , social science , linguistics , philosophy , physics , quantum mechanics , sociology , human capital
We examine the theoretical interrelations between progressive income taxation and macroeconomic (in)stability in an otherwise standard one‐sector AK model of endogenous growth with utility‐generating government purchases of goods and services. In sharp contrast to traditional Keynesian‐type stabilization policies, progressive taxation operates like an automatic destabilizer that generates equilibrium indeterminacy and belief‐driven fluctuations in our endogenously growing macroeconomy. Unlike the no‐sustained‐growth counterpart, this instability result is obtained regardless of (i) the degree of the public‐spending preference externality and (ii) whether private and public consumption expenditures are substitutes, complements or additively separable in the household's utility function.