Can consumption taxes stabilize the economy in the presence of consumption externalities?

Research output: Chapter in Book/Report/Conference proceedingChapterpeer-review

Abstract

We discuss the stabilization role of consumption taxes under a balanced-budget rule in the presence of consumption externalities of the “keeping up with the Joneses” type. We consider a finance constrained economy and depart from a situation where sufficiently strong externalities make the steady state indeterminate, if government intervention is absent. Sufficiently procyclical consumption tax rates are able to ensure local saddle path stability. However, this procyclicality leads to the appearance of another steady state with lower levels of output which is a source or indeterminate. Therefore, government intervention with stabilization purposes may not be successful.
Original languageEnglish
Title of host publicationSunspots and Non-Linear Dynamics
PublisherSpringer
Pages259-278
Number of pages20
ISBN (Electronic)9783319440767
ISBN (Print)9783319440743, 9783319829760
DOIs
Publication statusPublished - 2017

Publication series

NameStudies in Economic Theory
PublisherSpringer
Volume31

Keywords

  • Indeterminacy
  • Consumption externalities
  • Consumption taxation
  • Steady state multiplicity

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