Equilibrium Dynamics in a Two-Sector Model with Taxes
ASU Economics Working Paper No. 13/2001
29 Pages Posted: 7 Aug 2001
Date Written: April 2001
In this paper we are concerned with the equilibrium dynamics of a two-sector model of endogenous growth with distortionary taxes. We show that for certain parameters values and tax schemes every equilibrium orbit--except the steady state solution--is non-interior; i.e., there are times in which one of the sectors is inactive. This analysis confirms that in multisector models the set of easily checkable, universal conditions that can guarantee the interiority of equilibrium solutions is rather limited.
Keywords: distortionary taxes, competitive equilibrium, dynamic instability, non-interior equilibrium orbit
JEL Classification: D90, E22
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