On the implications of a balanced budget rule - an adaptive learning perspective

Show full item record


Title: On the implications of a balanced budget rule - an adaptive learning perspective
Author: Rudanko, Leena
Contributor: University of Helsinki, Faculty of Social Sciences, Department of Political Science
Date: 2003-01-03
Language: en
URI: http://hdl.handle.net/10138/10481
Thesis level: Licentiate thesis
Abstract: One argument against the use of balanced budget rules by government is the possibility of indeterminacy demonstrated by Schmitt-Groh6 and Uribe (1997). They show that in a standard neoclassical growth model a balanced budget rule combined with high labor taxation can lead to indeterminacy of steady state equilibria. This implies that the equilibrium may exhibit excess volatility due to belief based endogenous fluctuations. This study looks more closely at the likelihood of such volatile equilibria occurring if agents do not have rational expectations. Utilizing an adaptive learning framework we show that the so called sunspot equilibria do not pose such a strong threat since they appear not to be learnable. The problem of volatility is not avoided, however, since in many cases there exists no alternative steady state solution. Henee any learnable equilibrium will be more complex in form regardless. We also present evidence that the lower bound on labor tax rates where these adverse effects can take place turns out to be lower when learnability properties are considered than when only indeterminacy is taken into account. In this study the neoclassical model used by Schmitt-Grohå and Uribe is adapted to discrete time resulting in a real business cycle model where a government each period sets capital and labor taxes under a balånced budget requirement. This non-linear model is analyzed by log-lineaxizing around a steady state. The rational expectations solutions of the linear model are computed and divided into two categories: fundamental and non-fundamental. The first category consists of so called minimal state variable solutions and the latter can include stationary sunspot solutions. Conditions are derived to determine the stability both solution types under adaptive learning expectations. Due to the lack of transparency of these results, the dynamies of the model are then studied in detail numerically for a calibration of the model used also by Schmitt-Grohå and Uribe. In addition to assessing the harmfulness of the indeterminacy caused by the balanced budget rule, this study contributes to the literature investigating the learnability properties of sunspot solutions.
Description: Endast sammandrag. Inbundna avhandlingar kan sökas i Helka-databasen (http://www.helsinki.fi/helka). Elektroniska kopior av avhandlingar finns antingen öppet på nätet eller endast tillgängliga i bibliotekets avhandlingsterminaler.Only abstract. Paper copies of master’s theses are listed in the Helka database (http://www.helsinki.fi/helka). Electronic copies of master’s theses are either available as open access or only on thesis terminals in the Helsinki University Library.Vain tiivistelmä. Sidottujen gradujen saatavuuden voit tarkistaa Helka-tietokannasta (http://www.helsinki.fi/helka). Digitaaliset gradut voivat olla luettavissa avoimesti verkossa tai rajoitetusti kirjaston opinnäytekioskeilla.
Subject: balanced budget rules
real business cycle models
adaptive learning

Files in this item

Total number of downloads: Loading...

Files Size Format View
abstract.pdf 48.76Kb PDF View/Open

This item appears in the following Collection(s)

Show full item record