Chaos, Sunspots, and Automatic Stabilizers

66 Pages Posted: 15 Oct 1996  

Lawrence J. Christiano

Northwestern University; Federal Reserve Bank of Cleveland; Federal Reserve Bank of Chicago; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER)

Sharon G. Harrison

Columbia University, Barnard College - Department of Economics

Date Written: August 1996

Abstract

We study a one-sector growth model which is standard except for the presence of an externality in the production function. The set of competitive equilibria is large. It includes constant equilibria, sunspot equilibria, cyclical and chaotic equilibria, and equilibria with deterministic or stochastic regime switching. The efficient allocation is characterized by constant employment and a constant growth rate. We identify an income tax-subsidy schedule that supports the efficient allocation as the unique equilibrium outcome. That schedule has two properties: (i) it specifies the tax rate to be an increasing function of aggregate employment, and (ii) earnings are subsidized when aggregate employment is at its efficient level. The first feature eliminates inefficient, fluctuating equilibria, while the second induces agents to internalize the externality.

Suggested Citation

Christiano, Lawrence J. and Harrison, Sharon G., Chaos, Sunspots, and Automatic Stabilizers (August 1996). NBER Working Paper No. w5703. Available at SSRN: https://ssrn.com/abstract=3485

Lawrence J. Christiano (Contact Author)

Northwestern University ( email )

2003 Sheridan Road
Evanston, IL 60208
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847-491-8231 (Phone)
847-491-7001 (Fax)

Federal Reserve Bank of Cleveland

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Federal Reserve Bank of Chicago

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Federal Reserve Bank of Minneapolis

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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Sharon G. Harrison

Columbia University, Barnard College - Department of Economics ( email )

3009 Broadway
New York, NY 10027
United States

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