Aggregate Instability and Fiscal Policies: Balanced Budget Rules and Productive Public Spending

Aggregate Instability and Fiscal Policies: Balanced Budget Rules and Productive Public Spending

I reexamine the aggregate stability property of fiscal policies with balanced budget rules using a standard one-sector growth model augmented by public production services and endogenous labor supply. I find the existence of an indeterminate balanced growth path with a continuum of competitive equilibrium paths when productive public spending on aggregate production is financed by fixed constant income taxes. In this economy, local and global indeterminacy emerges when there is a high elasticity of labor supply and a low ratio of capital–labor shares in the aggregate production, independent of usual indeterminacy conditions such as predetermined government spending, the source of government revenue, the type of distortionary taxes, the composition of government expenditures, and the procyclicality of government spending.