Balanced-budget rules and aggregate instability: the role of capital utilization
نویسندگان
چکیده
Schmitt-Grohé and Uribe (1997) demonstrate that a balanced-budget fiscal policy can induce aggregate instability unrelated to economic fundamentals. The empirical relevance of this result has been challenged by subsequent studies. In this paper we show that such extrinsic instability is an empirically robust plausibility associated with a balanced-budget rule once endogenous capital utilization is taken into consideration. This suggests that the consideration, design, or operation of a balanced-budget fiscal policy must recognize that it may constitute a practical source of self-fulfilling beliefs or sunspots expectations. JEL classification: E32; E62
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