Hostname: page-component-848d4c4894-p2v8j Total loading time: 0 Render date: 2024-05-09T16:51:44.324Z Has data issue: false hasContentIssue false
  • English
  • Français

A NOTE ON THE SECTORAL COMPOSITION OF GOVERNMENT SPENDING, PROGRESSIVE TAXATION AND AGGREGATE (IN)STABILITY

Published online by Cambridge University Press:  12 December 2019

Dou Jiang
Dou Jiang*
Affiliation:
Tianjin University of Finance and Economics
*
Address correspondence to: Dou Jiang, Tianjin University of Finance and Economics, 25 Zhujiang Road, Hexi District, Tianjin, China. e-mail: dou.jiang@uqconnect.edu.au.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper analyzes the effect of the sectoral composition of government spending on the stability properties of a two-sector economy with a progressive tax structure. The results suggest that indeterminacy is more likely to occur if the fraction of government spending on consumption goods increases. This study also finds that, under progressive taxation, a sufficiently high public-consumption share is needed to generate indeterminacy. It is shown that, with the benchmark parameterization, a higher fraction of government spending on consumption goods needs to be implemented with a more progressive tax scheme to stabilize the economy. Moreover, it is emphasized that belief-driven economic fluctuations may indeed be a feature of the U.S. economy.

Keywords

Sectoral Composition of Government SpendingTax ProgressivityStability Properties
Type
Note
Information
Macroeconomic Dynamics , Volume 25 , Issue 7 , October 2021 , pp. 1922 - 1936
Copyright
© Cambridge University Press 2019

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

I would like to thank the Editor, Associate Editor, and two anonymous referees for very helpful comments. All remaining errors are my own.

References

REFERENCES

Abad, N., Seegmuller, T. and Venditti, A. (2017) Nonseparable preferences do not rule out aggregate instability under balanced-budget rules: A note. Macroeconomic Dynamics 21, 259–277.10.1017/S1365100515000358CrossRefGoogle Scholar
Benhabib, J. and Farmer, R. E. A. (1996) Indeterminacy and sector-specific externalities. Journal of Monetary Economics 37, 421–443.10.1016/0304-3932(96)01257-3CrossRefGoogle Scholar
Chang, J.-J., Guo, J.-T., Shieh, J.-Y. and Wang, W.-N. (2015) Sectoral composition of government spending and macroeconomic (in)stability. Economic Inquiry 53(1), 23–33.10.1111/ecin.12127CrossRefGoogle Scholar
Chang, J.-J., Guo, J.-T., Shieh, J.-Y. and Wang, W.-N. (2019) Sectoral composition of government spending, distortionary income taxation, and macroeconomic (in)stability. International Journal of Economic Theory 15, 95–107.10.1111/ijet.12203CrossRefGoogle Scholar
Chen, S.-H. and Guo, J.-T. (2013) Progressive taxation and macroeconomic (in)stability with productive government spending. Journal of Economic Dynamics and Control 37, 951–963.10.1016/j.jedc.2013.01.004CrossRefGoogle Scholar
Chen, S.-H. and Guo, J.-T. (2014) Progressive taxation and macroeconomic (in)stability with utility-generating government spending. Journal of Macroeconomics 42, 174–183.10.1016/j.jmacro.2014.08.002CrossRefGoogle Scholar
Fernàndez, E., Novales, A. and Ruiz, J. (2004) Indeterminacy under non-separability of public consumption and leisure in the utility function. Economic Modelling 21, 409–428.10.1016/S0264-9993(03)00038-5CrossRefGoogle Scholar
Futagami, K., Iwaisako, T. and Ohdoi, R. (2008) Debt policy rule, productive government spending, and multiple growth paths. Macroeconomic Dynamics 12(4), 445–462.CrossRefGoogle Scholar
Ghilardi, M. F. and Rossi, R. (2014) Aggregate stability and balanced-budget rules. Journal of Money, Credit and Banking 46(8), 1787–1809.10.1111/jmcb.12166CrossRefGoogle Scholar
Gokan, Y. (2008) Alternative government financing and aggregate fluctuations driven by self-fulfilling expectations. Journal of Economic Dynamics and Control 32, 1650–1679.10.1016/j.jedc.2007.06.012CrossRefGoogle Scholar
Guo, J.-T. and Harrison, S. G. (2001) Tax policy and stability in a model with sector-specific externalities. Review of Economic Dynamics 4, 75–89.10.1006/redy.2000.0105CrossRefGoogle Scholar
Guo, J.-T. and Harrison, S. G. (2004) Balanced-budget rules and macroeconomic (in)stability. Journal of Economic Theory 119, 357–363.10.1016/j.jet.2004.02.002CrossRefGoogle Scholar
Guo, J.-T. and Harrison, S. G. (2008) Useful government spending and macroeconomic (in)stability under balanced-budget rules. Journal of Public Economic Theory 10(3), 383–397.10.1111/j.1467-9779.2008.00368.xCrossRefGoogle Scholar
Guo, J.-T. and Harrison, S. G. (2015) Indeterminacy with progressive taxation and sector-specific externalities. Pacific Economic Review 20(2), 268–281.10.1111/1468-0106.12106CrossRefGoogle Scholar
Guo, J.-T. and Lansing, K. J. (1998) Indeterminacy and stabilization policy. Journal of Economic Theory 82, 481–490.10.1006/jeth.1997.2446CrossRefGoogle Scholar
Harrison, S. G. (2001) Indeterminacy in a model with sector-specific externalities. Journal of Economic Dynamics and Control 25, 747–764.10.1016/S0165-1889(99)00040-8CrossRefGoogle Scholar
Harrison, S. G. (2003) Returns to scale and externalities in the consumption and investment sectors. Review of Economic Dynamics 6, 963–976.10.1016/S1094-2025(03)00034-6CrossRefGoogle Scholar
Heathcote, J., Storesletten, K. and Violante, G. L. (2017) Optimal tax progressivity: An analytical framework. The Quarterly Journal of Economics 132(4), 1693–1754.10.1093/qje/qjx018CrossRefGoogle Scholar
Hori, T. and Maebayashi, N. (2019) Debt policy rule, utility-generating government spending, and indeterminacy of the transition path in an AK model. Macroeconomic Dynamics 23(6), 2360–2377.10.1017/S1365100517000724CrossRefGoogle Scholar
Kamiguchi, A. and Tamai, T. (2011) Can productive government spending be a source of equilibrium indeterminacy? Economic Modelling 28, 1335–1340.10.1016/j.econmod.2011.01.014CrossRefGoogle Scholar
Minea, A. and Villieu, P. (2012) Persistent deficit, growth, and indeterminacy. Macroeconomic Dynamics 16(S2), 267–283.10.1017/S1365100511000435CrossRefGoogle Scholar
Ni, S. (1995) An empirical analysis on the substitutability between private consumption and government purchases. Journal of Monetary Economics 36, 593–605.10.1016/0304-3932(95)01233-8CrossRefGoogle Scholar
Schmitt-Grohé, S. and Uribe, M. (1997) Balanced-budget rules, distortionary taxes, and aggregate instability. Journal of Political Economy 105(5), 976–1000.10.1086/262101CrossRefGoogle Scholar