Destabilizing Balanced-Budget Consumption Taxes in Multi-Sector Economies

Kazuo Nishimura (1) , Carine Nourry (2, 3) , Thomas Seegmuller (2) , Alain Venditti (2, 4)

1 Institute of Economic Research, Kyoto University
2 GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille
3 IUF - Institut universitaire de France
4 EDHEC Business School

We examine the impact of balanced-budget consumption taxes on the existence of expectations-driven business cycles in two-sector economies with infinitely-lived households. We prove that, whatever the relative capital intensity difference across sectors, aggregate instability can occur if the consumption tax rate is not too low. Moreover, we show through a numerical exercise based on empirically plausible tax rates that endogenous business-cycle fluctuations may be a source of instability for all OECD countries, including the US.

Mots clés: consumption taxes; balanced-budget rule; infinite-horizon two-sector model; aggregate instability; indeterminacy; expectations-driven fluctuations

Domaines: Economies et finances

Kazuo Nishimura, Carine Nourry, Thomas Seegmuller, Alain Venditti. Destabilizing Balanced-Budget Consumption Taxes in Multi-Sector Economies. 2012. ⟨halshs-00796685⟩