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Cover of: Indeterminacy and Stabilization of Endogenous Cycles with Balanced-Budget Distortionary Taxation
Erkki Koskela, Mikko Puhakka

Indeterminacy and Stabilization of Endogenous Cycles with Balanced-Budget Distortionary Taxation

Section: Articles
Volume 62 (2006) / Issue 2, pp. 149-167 (19)
Published 09.07.2018
DOI 10.1628/001522106X120631
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Summary
We study the effects of distortionary labor taxation on endogenous cycles and the indeterminacy of equilibria in an overlapping-generations model with a balanced-budget rule. Under proportional taxation there is a critical tax rate above which cycles vanish, while with linearly progressive taxation there is a critical level of tax exemption below which cycles also vanish. If the utility function is quasilinear, increasing the tax rate can cause the economy to become determinate both with proportional and with linearly progressive taxation, whereas a sufficiently high tax exemption can make equilibrium indeterminate if the utility function is more general.