Research Discussion Papers, Bank of Finland
No 29/2004:
Equilibrium dynamics under lump-sum taxation in an exchange economy with skewed endowments
Mikko Puhakka ()
Abstract: I explore the dynamics in overlapping generations models
with pure exchange and lump-sum taxes, when the second period after tax
endowment is negative, and contrast the characteristics of equilibria to
those of models with positive after tax endowments. In particular, if the
intertemporal elasticity of substitution is less than unity, there can be
only a two cycle or stable (ie indeterminate) equilibria for certain
parameter values. With this value for that elasticity chaos and a cycle of
any order can occur in a model with regular endowments. In a sense the
lump-sum taxation in this model operates as a stabilizing device. The
precise stability condition holds with a small discount factor and in
economies with relatively high taxes in the first period. If the
intertemporal elasticity of substitution is greater than unity, the steady
state equilibria are unstable, and thus determinate, as is the case with
the regular model.
Keywords: overlapping generations economy; saving; cycles; lump-sum taxation; (follow links to similar papers)
JEL-Codes: E21; E32; (follow links to similar papers)
25 pages, October 13, 2004
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