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Aggregate Stability and Balanced-Budget Rules (Electronic book text)
Aggregate Stability and Balanced-Budget Rules (Electronic book text): Matteo Ghilardi, Raffaele Rossi
Aggregate Stability and Balanced-Budget Rules (Electronic book text): Matteo Ghilardi, Raffaele Rossi

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Aggregate Stability and Balanced-Budget Rules (Electronic book text)

Matteo Ghilardi, Raffaele Rossi

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It has been shown that under perfect competition and a Cobb-Douglas production function, a basic real business cycle model may exhibit indeterminacy and sunspot fluctuations when income tax rates are determined by a balanced-budget rule. This paper introduces in an otherwise standard real business cycle model a more general and data coherent class of production functions, namely a constant elasticity of substitution production function. We show that the degree of substitutability between production factors is a key ingredient to understand the (de)stabilising properties of a balanced-budget rule. Then we calibrate the model consistently with the empirical evidence, i.e. we set the elasticity of substitution between labour and capital below unity. We show that compared to the Cobb-Douglas case, the likelihood of indeterminacy under a balanced-budget rule is greatly reduced in the United States, the European Union and the United Kingdom.

General

Imprint: International Monetary Fund
Country of origin: United States
Release date: February 2014
Authors: Matteo Ghilardi • Raffaele Rossi
Format: Electronic book text - Windows
Pages: 26
ISBN-13: 978-1-4755-1582-4
Categories: Promotions
Books > Business & Economics > Economics > Labour economics
Books > Business & Economics > Economics > Labour economics > General
LSN: 1-4755-1582-0
Barcode: 9781475515824

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