Chaos, sunspots and automatic stabilizers

Lawrence J. Christiano*, Sharon G. Harrison

*Corresponding author for this work

Research output: Contribution to journalArticle

85 Scopus citations

Abstract

We consider a real business cycle model with an externality in production. Depending on parameter values, the model has sunspot equilibria, cyclical and chaotic equilibria, and equilibria with deterministic or stochastic regime switching. We study the implications of this model environment for automatic stabilizer tax systems. Stabilization is desirable because the efficient allocations are characterized by constant employment and output growth. We identify an automatic stabilizer income tax-subsidy schedule with two properties: (i) it specifies the tax rate to be an increasing function of aggregate employment, and (ii) earnings are subsidized when aggregate employment is at its efficient level. The first feature eliminates inefficient, fluctuating equilibria, while the second induces agents to internalize the externality.

Original languageEnglish (US)
Pages (from-to)3-31
Number of pages29
JournalJournal of Monetary Economics
Volume44
Issue number1
DOIs
StatePublished - Aug 1999

Keywords

  • Business cycle
  • E13
  • E32
  • E62
  • Fiscal policy
  • Multiple equilibria
  • Regime switching
  • Stabilization

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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