We re-examine the destabilizing role of balanced-budget fiscal policy rules based on consumption taxation. Using a one-sector model with infinitely-lived households, we consider a specification of preferences derived from Jaimovich (2008) [14] and Jaimovich and Rebelo (2009) [15] which is flexible enough to encompass varying degrees of income effect. When the income effect is not too large, we show that there exists a Laffer curve, which explains the multiplicity of steady states, and that non-linear consumption taxation may destabilize the economy, promoting expectation-driven fluctuations, if the elasticity of intertemporal substitution in consumption is sufficiently larger than one and the tax rate is counter-cyclical with respect to consumption. Numerical illustrations also show that consumption taxation may be a source of instability for most OECD countries for a wide range of structural parametersʼ configurations. We finally prove the robustness of our conclusions if we consider a discrete-time setup.

The aim of this paper is to discuss the role of the returns to scale at the private and social levels on the local determinacy properties of the steady state in a continuous-time two-sector economy with sector-specific externalities. First we show that when labor is inelastic, for any configuration of the returns to scale, local indeterminacy is obtained if there is a capital intensity reversal between the private and the social levels. Second, we prove that when labor is infinitely elastic, saddle-point stability is obtained as soon as the investment good sector has constant social returns while local indeterminacy arises if the investment good sector has increasing social returns, provided the consumption good is labor intensive at the social level and the elasticity of intertemporal substitution in consumption admits intermediary values. Finally, we show that local indeterminacy requires a low elasticity of labor when the investment good has constant social returns, but requires either low enough or large enough elasticity of labor when the investment good has increasing social returns.

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We consider a one-sector Ramsey-type growth model with inelastic labor and learning-by-doing externalities based on cumulative gross investment (cumulative production of capital goods), which is assumed, in accordance with Arrow (1962), to be a better index of experience than the average capital stock. We prove that a slight memory effect characterizing the learning-by-doing process is enough to generate business cycle fluctuations through a Hopf bifurcation leading to stable periodic orbits. This is obtained for reasonable parameter values, notably for both the amount of externalities and the elasticity of intertemporal substitution. Hence, contrary to all the results available in the literature on aggregate models, we show that endogenous fluctuations are compatible with a low (in actual fact, zero) wage elasticity of the labor supply.