Xue, J., K. Chong——Journal of Public Economic Theory: Balanced-Budget Rules,Elsticity of Substitution,and Macroeconomic (in)Stability
时间:2015-04-08
This paper examines the relation between factor substitution and (local) stability of equilibria in a one‐sector real business cycle model under balanced‐budget rules. We show that under non‐unitary elasticity of factor substitution, the Schmitt‐Grohé‐Uribe indeterminacy result can be altered. Using the two‐step normalization procedure, we highlight two opposing effects of factor substitution, namely, the efficiency effect and the distribution effect, on aggregate stability. With endogenous dist