International Journal of Economic Theory

Time‐varying consumption tax, productive government spending, and aggregate instability

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Abstract In this paper we investigate if government balanced‐budget rules together with endogenous taxation may lead to aggregate instability in an endogenous growth framework. After highlighting the differences with the exogenous growth framework, we prove that under counter‐cyclical consumption taxes, while there exists a unique balanced growth path, sunspot equilibria based on self‐fulfilling expectations occur through a form of global indeterminacy. In addition, we argue that this result is empirically plausible for a large set of OECD countries and that it may also emerge with endogenous income taxes.

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