Non-Separable Preferences do not Rule Out Aggregate Instability under Balanced-Budget Rules: A Note

Nicolas Abad (1) , Thomas Seegmuller (1) , Alain Venditti (1, 2)

1 AMSE - Aix-Marseille Sciences Economiques
2 EDHEC - EDHEC Business School

We investigate the role of non-separable preferences on the occurrence of macroeconomic instability under a balanced-budget rule where government spending is financed by a tax on labor income. Considering a one-sector neoclassical growth model with a large class of non-separable utility functions, we find that expectations-driven fluctuations easily occur when consumption and labor are Edgeworth substitutes or weak Edgeworth complements. Under these properties, an intermediate range of tax rates and a sufficiently low elasticity of intertemporal substitution in consumption lead to instability.

Mots clés: indeterminacy; expectations-driven business cycles; labor income taxes; balanced-budget rule; non-separable preferences

Domaines: Economies et finances

Nicolas Abad, Thomas Seegmuller, Alain Venditti. Non-Separable Preferences do not Rule Out Aggregate Instability under Balanced-Budget Rules: A Note. 2014. ⟨halshs-01933532⟩