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Balanced-Budget Rules and Aggregate Instability: The Role of Consumption Taxes in a Monetary Economy

Author

Listed:
  • Jianpo Xue

    (Renmin University of China)

  • Chong K. Yip

    (The Chinese University of Hong Kong and Hong Kong Institute for Monetary Research)

Abstract
This paper examines the stabilizing property of consumption taxation in a balanced-budget setting of a neoclassical one-sector cash-in-advance economy. We find that saddle-path stability is not a necessary outcome even though the utility function is additively separable between consumption and leisure. Both the existence of a Laffer curve and the indeterminacy outcome of consumption taxation depend on the elasticities of intertemporal substitution in consumption and of labor supply. Numerical examples show that consumption tax may lead to aggregate instability for the OECD countries under the current over-easy monetary policies.

Suggested Citation

  • Jianpo Xue & Chong K. Yip, 2013. "Balanced-Budget Rules and Aggregate Instability: The Role of Consumption Taxes in a Monetary Economy," Working Papers 112013, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:112013
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    References listed on IDEAS

    as
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    Cited by:

    1. Zhiming Fu & Antoine Le Riche, 2021. "Progressive consumption tax and monetary policy in an endogenous growth model," Journal of Economics, Springer, vol. 133(3), pages 271-293, August.
    2. Le Riche, Antoine, 2022. "Balanced-budget fiscal rules and money growth pegging," Journal of Macroeconomics, Elsevier, vol. 73(C).
    3. Zhiming Fu & Antoine Le Riche, 2022. "Public spending, monetary policy and macroeconomic instability," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(3), pages 580-608, June.
    4. Fujisaki, Seiya, 2016. "Equilibrium Determinacy and Policy Rules : Role of Productive Money and Government Expenditure," MPRA Paper 69834, University Library of Munich, Germany.
    5. Fujisaki, Seiya, 2016. "Aggregate Stability in Monetary Economy with Consumption Tax and Taylor Rule," MPRA Paper 69833, University Library of Munich, Germany.

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    More about this item

    Keywords

    Balanced-Budget Rules; Consumption Tax; CIA Constraint; Indeterminacy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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