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Nonseparable preferences do not rule out aggregate instability under balanced-budget rules: a note

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Abad, Nicolas | Seegmuller, Thomas | Venditti, Alain

Edité par HAL CCSD

ACL-2. International audience. We investigate the role of nonseparable preferences in the occurrence of macroeconomic instability under a balanced-budget rule where government spending is financed by a tax on labor income. Considering a one-sector neoclassical growth model with a large class of nonseparable utility functions, we find that expectations-driven fluctuations occur easily when consumption and labor are Edgeworth substitutes or weak Edgeworth complements. Under these assumptions, an intermediate range of tax rates and a sufficiently low elasticity of intertemporal substitution in consumption lead to instability.

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