A NOTE ON THE SECTORAL COMPOSITION OF GOVERNMENT SPENDING, PROGRESSIVE TAXATION AND AGGREGATE (IN)STABILITY.

This paper analyzes the effect of the sectoral composition of government spending on the stability properties of a two-sector economy with a progressive tax structure. The results suggest that indeterminacy is more likely to occur if the fraction of government spending on consumption goods increases. This study also finds that, under progressive taxation, a sufficiently high public-consumption share is needed to generate indeterminacy. It is shown that, with the benchmark parameterization, a higher fraction of government spending on consumption goods needs to be implemented with a more progressive tax scheme to stabilize the economy. Moreover, it is emphasized that belief-driven economic fluctuations may indeed be a feature of the U.S. economy. [ABSTRACT FROM AUTHOR]