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Destabilizing balanced-budget consumption taxes in multi-sector economies


  • We acknowledge the financial support of the French National Research Agency Grant (ANR-08-BLAN-0245-01) and of the Grant-in-Aid for Scientific Research, JSPS (#23000001, #23330063). We thank L. Julien, A. Saïdi, and an anonymous referee for useful comments and suggestions. This paper also benefited from a presentation at the Macroeconomic Seminar of THEMA in the University of Nanterre.



We examine the impact of balanced-budget consumption taxes on the existence of expectations-driven business cycles in two-sector economies with infinitely lived households. We prove that, whatever the relative capital intensity difference across sectors, aggregate instability can occur if the consumption tax rate is not too low. Moreover, we show through a numerical exercise based on empirically plausible tax rates that endogenous business-cycle fluctuations may be a source of instability for all OECD countries, including the US.