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A NOTE ON THE SECTORAL COMPOSITION OF GOVERNMENT SPENDING, PROGRESSIVE TAXATION AND AGGREGATE (IN)STABILITY

Published online by Cambridge University Press:  12 December 2019

Dou Jiang
Dou Jiang*
Affiliation:
Tianjin University of Finance and Economics
*
Address correspondence to: Dou Jiang, Tianjin University of Finance and Economics, 25 Zhujiang Road, Hexi District, Tianjin, China. e-mail: [email protected].
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Abstract

This paper analyzes the effect of the sectoral composition of government spending on the stability properties of a two-sector economy with a progressive tax structure. The results suggest that indeterminacy is more likely to occur if the fraction of government spending on consumption goods increases. This study also finds that, under progressive taxation, a sufficiently high public-consumption share is needed to generate indeterminacy. It is shown that, with the benchmark parameterization, a higher fraction of government spending on consumption goods needs to be implemented with a more progressive tax scheme to stabilize the economy. Moreover, it is emphasized that belief-driven economic fluctuations may indeed be a feature of the U.S. economy.

Keywords

Sectoral Composition of Government SpendingTax ProgressivityStability Properties
Type
Note
Information
Macroeconomic Dynamics , Volume 25 , Issue 7 , October 2021 , pp. 1922 - 1936
Copyright
© Cambridge University Press 2019

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Footnotes

I would like to thank the Editor, Associate Editor, and two anonymous referees for very helpful comments. All remaining errors are my own.

References

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