Macroeconomic stability under balanced‐budget rules and no‐income‐effect preferences

It has been analytically shown that under an additively separable preference formulation between consumption and hours worked, indeterminacy sunspots may arise in a standard one-sector real business cycle model when the labor tax rate is endogenously determined by balanced-budget rule with pre-specified constant level of government expenditures. This paper finds local disappears if period utility function postulated to exhibit no income effect on household's demand for leisure. In particular, model's low-tax steady state always displays saddle-path stability equilibrium uniqueness; whereas high-tax either source or saddle point.