The Korean Economic Review
Aggregate Instability and Fiscal Policies: Balanced Budget Rules and Productive Public Spending
Hyun Park (Kyung Hee University)Year 2015Vol. 31No. 1
This article revisits the aggregate stability property of fiscal policies with balanced budgetrules using a standard one-sector growth model. As in Schmitt-Grohe and Uribe (1997)aggregate instability is driven by self-filling beliefs in the presence of multiple equilibriumpaths. However, I find the existence of an indeterminate balanced growth path with acontinuum of competitive equilibrium paths when productive public spending on aggregateproduction is endogenously financed by a predetermined rate of income taxes underbalanced budget rules. In this economy, local and global indeterminacy emerges when laborsupply is highly elastic and a slope of aggregate (not necessarily individual) labor demand ispositive by the productivity of public spending, independent of the usual indeterminacyconditions under fiscal policies such as types of distortionary taxes, sources of governmentrevenue, composition of government expenditure, countercyclical taxation, andpredetermined public spending.