Indeterminacy and Stabilization Policy

Posted: 8 Oct 1998

See all articles by Jang-Ting Guo

Jang-Ting Guo

University of California, Riverside (UCR) - Department of Economics; University of California, Riverside

Kevin J. Lansing

Federal Reserve Banks - Federal Reserve Bank of San Francisco

Abstract

It has been shown that a one-sector real business cycle model with sufficient increasing returns in production may possess an indeterminate steady state that can be exploited to generate business cycles driven by "animal spirits" of agents. This paper shows how an income tax schedule that exhibits a progressivity feature can ensure saddle path stability in such a framework and thereby stabilize the economy against sunspot fluctuations. Conversely, an economy with a flat or regressive tax schedule is more susceptible to indeterminacy.

JEL Classification: E32, E62

Suggested Citation

Guo, Jang-Ting and Lansing, Kevin J., Indeterminacy and Stabilization Policy. Available at SSRN: https://ssrn.com/abstract=92196

Jang-Ting Guo (Contact Author)

University of California, Riverside (UCR) - Department of Economics ( email )

3133 Sproul Hall
Riverside, CA 92521
United States
951-827-1588 (Phone)
951-787-5685 (Fax)

University of California, Riverside ( email )

HOME PAGE: http://faculty.ucr.edu/~guojt/index.html

Kevin J. Lansing

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

101 Market Street
PO Box 7702
San Francisco, CA 94105
United States
415-974-2393 (Phone)
415-977-4031 (Fax)

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