search query: @author Schmitt-Grohé, S. / total: 6
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| Author: | Schmitt-Grohe, S. Uribe, M. |
| Title: | Balanced-budget rules, distortionary taxes, and aggregate instability |
| Journal: | Journal of Political Economy
1997 : OCT, VOL. 105:5, p. 976-1000 |
| Index terms: | POLITICAL ECONOMY BUDGET TAXATION |
| Language: | eng |
| Abstract: | A traditional argument against a balanced-budget fiscal policy rule is that it amplifies business cycles by stimulating aggregate demand during booms via tax cuts and higher public expenditures and by reducing demand during recessions through a corresponding fiscal contraction. This paper suggests an additional source of instability that may arise from this type of fiscal policy rule. It shows that, within the standard neoclassical growth model, a balanced-budget rule can make expectations of higher tax rates self-fulfilling if the fiscal authority relies heavily on changes in labour income taxes to eliminate short-run fiscal imbalances. |
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