Journal of Political Economy Vol. 105 No. 5 1997
Balanced‐Budget Rules, Distortionary Taxes, and Aggregate Instability
Abstract
A traditional argument against a balanced-budget fiscal policy rule is that it amplifies business cycles by stimulating aggregate demand during booms via tax cuts and higher public expenditures and by reducing demand during recessions through a corresponding fiscal contraction. This paper suggests an additional source of instability that may arise from this type of fiscal policy rule. It shows that, within the standard neoclassical growth model, a balanced-budget rule can make expectations of higher tax rates self-fulfilling if the fiscal authority relies heavily on changes in labor income taxes to eliminate short-run fiscal imbalances.
- DOI
- 10.1086/262101
- Volume
- 105
- Issue
- 5
- Pages
- 976-1000
- Language
- en
- Sources
- crossref openalex bibtex:phds-export.bib