Hostname: page-component-cd9895bd7-7cvxr Total loading time: 0 Render date: 2024-12-23T07:27:37.233Z Has data issue: false hasContentIssue false
  • English
  • Français

NONCONNECTEDNESS OF THE SET OF BANKRUPTCY-FREE MONEY EQUILIBRIA IN THE STATIC ECONOMY: A CONSTRUCTIVE EXAMPLE

Published online by Cambridge University Press:  07 March 2013

Minwook Kang
Minwook Kang*
Affiliation:
Cornell University
*
Address correspondence to: Minwook Kang, Department of Economics, Cornell University, 453 Uris Hall, Ithaca, NY 14853, USA; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

A static economy in which nominal taxes and transfers are balanced, as proposed by Balasko and Shell (1993), typically has a continuum of equilibrium money prices. This paper presents a constructive example in which the set of equilibrium money prices is not connected. By allowing negative consumption as a mathematical construct, closed form solutions for equilibrium tax-adjusted income are derived. The main result of the example implies that bankrupt taxpayers with negative tax-adjusted income can be free from bankruptcy as the price of money increases. This paradoxical outcome is similar to that of the transfer paradox, as suggested by Gale (1974), where tax-transfer plans make taxpayers better off.

Keywords

Nominal Taxes and TransfersTransfer ParadoxTax-Adjusted IncomeBankruptcy
Type
Articles
Information
Macroeconomic Dynamics , Volume 18 , Issue 7 , October 2014 , pp. 1539 - 1546
Copyright
Copyright © Cambridge University Press 2013 

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

Balasko, Y. and Shell, K. (1993) Lump-sum taxation: The static economy. In Becker, R., Boldrin, M., Jones, R., and Thomson, W. (eds.), General Equilibrium, Growth and Trade. Essays in Honor of Lionel McKenzie, Vol. 2, pp. 168–180. San Diego, CA: Academic Press.Google Scholar
Chichilnisky, G. (1980) Basic goods, the effects of commodity transfers and the international economic order. Journal of Development Economics 7 (4), 505–519.Google Scholar
Gale, D. (1974) Exchange equilibrium and coalitions: An example. Journal of Mathematical Economics 1 (1), 63–66.CrossRefGoogle Scholar
Garratt, R. (1992) The connectedness of the set of equilibrium money prices depends on the choice of the numeraire. Journal of Economic Theory 56 (1), 206–217.Google Scholar
Grandmont, J.M. and McFadden, D. (1972) A technical note on classical gains from trade. Journal of International Economics 2 (2), 109–125.CrossRefGoogle Scholar
Guesnerie, R. and Laffont, J.-J. (1978) Taxing price makers. Journal of Economic Theory 19 (2), 423–455.Google Scholar
Jones, R. (1985) Income effects and paradoxes in the theory of international trade. Economic Journal 95 (378), 330–344.Google Scholar
Kang, M. and Ye, L. (2012) Coalition-Enhancing Fiscal Policies in an Open Economy: A CES Framework of Gale's Transfer Paradox. Working paper, Cornell University.Google Scholar
Léonard, D. and Manning, R. (1983) Advantageous reallocations: A constructive example. Journal of International Economics 15, 291–295.CrossRefGoogle Scholar
Peck, J. (1987) Non-connectedness of the set of equilibrium money prices: The static economy. Journal of Economic Theory 43 (2), 348–354.Google Scholar
Yano, M. (1983) Welfare aspects of the transfer problem. Journal of International Economics 15, 277–289.Google Scholar