Program > Papers by author > Minea Alexandru

Budget Rules, Distortionnary Taxes, and Aggregate Instability: A reappraisal
Maxime Menuet  1, 2@  , Patrick Villieu  2@  , Alexandru Minea  3@  
1 : Laboratoire d'Economie d'Orléans  (LEO)
Laboratoire d'Economie d'Orléans
2 : Laboratoire d'Economie d'Orléans
Université d'Orléans
3 : CERDI
Université d'Auvergne - Clermont-Ferrand I

In a seminal contribution, Schmitt-Grohé and Uribe (JPE, 1997), showed that the balanced budget
rule (BBR) produces aggregate instability in an exogenous growth model with labor tax-based
adjustment. The present paper challenges this result in an endogenous growth framework
with a more general budget rule, involving deficit and debt in the long-run and making the BBR
a special case. We show that the emergence of aggregate instability dramatically depends on
the level of public spending. In particular, low public spending ensures determinacy. However,
in the case of high public spending, multiplicity arises, with four potential equilibria: two
high-growth BGPs, a low-growth trap, and a “catastrophic” equilibrium where the economy
asymptotically collapses. In addition, when the ratio of public spending is sufficiently large, a
subcritical Hopf bifurcation appears around the low-growth trap, giving rise to a homoclinic
orbit going around the neighborhood of the catastrophic equilibrium. A calibration exercise
confirms that these results are obtained for realistic values of parameters.


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