Hostname: page-component-586b7cd67f-dsjbd Total loading time: 0 Render date: 2024-11-26T14:12:45.324Z Has data issue: false hasContentIssue false
  • English
  • Français

INDETERMINACY AND PERIOD LENGTH UNDER BALANCED BUDGET RULES

Published online by Cambridge University Press:  28 February 2012

Alexis Anagnostopoulos  and
Chryssi Giannitsarou
Alexis Anagnostopoulos
Affiliation:
State University of New York at Stony Brook
Chryssi Giannitsarou*
Affiliation:
University of Cambridge and CEPR
*
Address correspondence to: Chryssi Giannitsarou, Faculty of Economics, Austin Robinson Building, Sidgwick Avenue, Cambridge CB3 9DD, UK; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

We analyze the importance of the frequency of decision making for macroeconomic dynamics, in the context of a simple, well-known business cycle model with balanced budget rules. We explain how the frequency of decision making (period length) and the measurement unit of time (calibration frequency) differ and examine how local stability is affected by changes in the period length. We find that as the period grows longer, indeterminacy occurs less often. This may have significant quantitative implications: for the model at hand, there is a wide range of economically relevant labor tax rates (from 30% to 38%) for which the continuous-time model gives indeterminacy, whereas the discrete-time model has determinate dynamics.

Keywords

CalibrationPeriod LengthLocal IndeterminacyDiscountingDepreciation
Type
Articles
Information
Macroeconomic Dynamics , Volume 17 , Issue 4 , June 2013 , pp. 898 - 919
Copyright
Copyright © Cambridge University Press 2012 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Aadland, D. and Huang, K.X.D. (2004) Consistent high-frequency calibration. Journal of Economic Dynamics and Control 28, 2277–2295.CrossRefGoogle Scholar
Abreu, D., Milgrom, P., and Pearce, D. (1991) Information and timing in repeated partnerships. Econometrica 59 (6), 1713–1733.CrossRefGoogle Scholar
Anagnostopoulos, A. and Giannitsarou, C. (2010) Modelling Time and Macroeconomic Dynamics. CEPR discussion paper 8050.Google Scholar
Azariadis, C. (1981) Self-fulfilling prophecies. Journal of Economic Theory 25, 380–396.CrossRefGoogle Scholar
Baierl, G., Nishimura, K., and Yano, M. (1998) The role of capital accumulation in multi-sectoral models. Journal of Economic Behavior and Organization 33, 467–479.CrossRefGoogle Scholar
Bambi, M. and Licandro, O. (2004) (In)determinacy and Time-to-Build. Working paper ECO 2004/17, European University Institute.Google Scholar
Bambi, M. and Gori, F. (2010) Unifying Time-to-Build Theory. Mimeo, University of York.Google Scholar
Benhabib, J. (2004), Interest rate policy in continuous time with discrete delays. Journal of Money, Credit and Banking 36, 1–15.CrossRefGoogle Scholar
Benhabib, J. and Farmer, R.E.A. (1994) Indeterminacy and increasing returns. Journal of Economic Theory 63, 19–41.CrossRefGoogle Scholar
Benhabib, J. and Farmer, R.E.A. (1999) Indeterminacy and sunspots in macroeconomics. In Taylor, J.B. and Woodford, M. (eds.), Handbook of Macroeconomics, vol. 1A, pp. 387–448. Elsevier.CrossRefGoogle Scholar
Bosi, S. and Ragot, L. (2009) Time, Bifurcations and Economic Applications. CES working paper 2009.28, Université Paris I.Google Scholar
Carlstrom, C.T. and Fuerst, T.S. (2005) Investment and interest rate policy: A discrete time analysis. Journal of Economic Theory 123, 4–20.CrossRefGoogle Scholar
Dupor, B. (2001) Investment and interest rate policy. Journal of Economic Theory 98, 85–113.CrossRefGoogle Scholar
Foley, D.K. (1975) On two specifications of asset equilibrium in macroeconomic model. Journal of Political Economy 83, 303–324.CrossRefGoogle Scholar
Guo, J.-T. (2004) Increasing returns, capital utilization, and the effects of government spending. Journal of Economic Dynamics and Control 28, 1059–1078.CrossRefGoogle Scholar
Hansen, G. (1985) Indivisible labor and the business cycle. Journal of Monetary Economics 16, 309–341.CrossRefGoogle Scholar
Hintermaier, T. (2005) A sunspot paradox. Economics Letters 87, 285–290.CrossRefGoogle Scholar
Karni, E. (1979) On the specification of asset equilibrium in macroeconomic models: A note. Journal of Political Economy 87, 171–177.CrossRefGoogle Scholar
Kydland, F.E. and Prescott, E.C. (1982) Time to build and aggregate fluctuations. Econometrica 50, 1345–1370.CrossRefGoogle Scholar
Leung, S.F. (1995) A distinction between continuous-time and discrete-time models of uncertain lifetime. Economics Letters 47, 291–296.CrossRefGoogle Scholar
Li, H. (2003) Inflation Determination under a Taylor Rule: Consequence of Endogenous Capital Accumulation. Mimeo, Brandeis University.Google Scholar
Licandro, O. and Puch, L.A. (2006) Is Discrete Time a Good Representation of Continuous Time? WP2006/28, European University Institute.Google Scholar
Medio, A. (2011) Simple and Complex Dynamics: A Hidden Parameter. Mimeo, University of Nice.Google Scholar
Mendoza, E.G., Razin, A., and Tesar, L.L. (1994) Effective tax rates in macroeconomics: Cross-country estimates of tax rates on factor incomes and consumption. Journal of Monetary Economics 34, 297–323.CrossRefGoogle Scholar
Mercenier, J. and Michel, P. (1994) Discrete-time finite horizon approximation of infinite horizon optimization problems with steady state invariance. Econometrica 62, 635–656.CrossRefGoogle Scholar
Mino, K., Nishimura, K., Shimomura, K., and Wang, P. (2008) Equilibrium dynamics in discrete-time endogenous growth models with social constant returns. Economic Theory 34, 1–23.CrossRefGoogle Scholar
Mitra, T. (1998) On the relationship between discounting and complicated behavior in dynamic optimization models. Journal of Economic Behavior and Organization 33, 421–434.CrossRefGoogle Scholar
Oberfield, E. and Trachter, N. (2011) Commodity Money with Frequent Search. Mimeo, Einaudi Institute for Economics and Finance.CrossRefGoogle Scholar
Obstfeld, M. (1992) Dynamic Optimization on Continuous Time Models: A Guide for the Perplexed. Mimeo, University of California, Berkeley.Google Scholar
Schmitt-Grohé, S. (1997) Comparing four models of aggregate fluctuations due to self-fulfilling expectations. Journal of Economic Theory 72, 96–147.CrossRefGoogle Scholar
Schmitt-Grohé, S. and Uribe, M. (1997) Balanced-budget rules, distortionary taxes, and aggregate instability. Journal of Political Economy 105, 976–1000.CrossRefGoogle Scholar
Telser, L.G. and Graves, R.L. (1968) Continuous and discrete time approaches to a maximization problem. Review of Economic Studies 35, 307–325.CrossRefGoogle Scholar
Turnovsky, S.J. (1977) On the formulation of continuous time macroeconomic models with asset accumulation. International Economic Review 18, 1–28.CrossRefGoogle Scholar
Turnovsky, S.J. and Burmeister, E. (1977) Perfect foresight, expectational consistency, and macroeconomic equilibrium. Journal of Political Economy 85, 379–393.CrossRefGoogle Scholar
Volkerink, B. and De Haan, J. (2001) Tax Ratios: A Critical Survey. OECD Tax Policy Studies 5.Google Scholar