Progressive taxation and (in)stability in an exogenous growth model with Epstein-Zin recursive preferences

Vasilev, Aleksandar (2021) Progressive taxation and (in)stability in an exogenous growth model with Epstein-Zin recursive preferences. Journal of Economics and Econometrics, 64 (1). pp. 51-68. ISSN 2032-9652

Full content URL: https://ideas.repec.org/a/eei/journl/v64y2021i1p51...

Documents
Progressive taxation and (in)stability in an exogenous growth model with Epstein-Zin recursive preferences
Accepted Manuscript
[img] PDF
indeterminacy_progressive_taxation_EZ_2021(1).pdf - Whole Document
Restricted to Repository staff only

282kB
Item Type:Article
Item Status:Live Archive

Abstract

We show that in a exogenous growth model with Epstein-Zin (1989, 1991) recursive preferences calibrated to Bulgarian data under the progressive taxation regime (1993-2007), the economy exhibits equilibrium indeterminacy. These results are in line with the findings in Benhabib and Farmer (1994, 1996) and Farmer (1999). Also, the findings in this paper are in contrast to Guo and Lansing (1988) who argue that progressive taxation works as an automatic stabilizer. In contrast, under the flat tax regime (2008-16), the same economy calibrated to Bulgarian data now displays saddle-path stability. The decrease in the average effective tax rate addresses the indeterminacy issue and eliminates the sink dynamics.

Keywords:Progressive taxation; Epstein-Zin preferences; Equilibrium (In)determinacy; Bulgaria
Subjects:L Social studies > L130 Macroeconomics
Divisions:Lincoln International Business School
ID Code:46889
Deposited On:15 Dec 2021 14:11

Repository Staff Only: item control page