02252cas a2200325 a 4500 AALejournalIMF014210 230101c9999 xx r poo 0 0eng d 5.00 USD 9781475582291 1018-5941 BD-DhAAL BD-DhAAL Ghilardi, Matteo. Aggregate Stability and Balanced-Budget Rules / Matteo Ghilardi, Raffaele Rossi. Washington, D.C. : International Monetary Fund, 2014. 1 online resource (26 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students It has been shown that under perfect competition and a Cobb-Douglas production function, a basic real business cycle model may exhibit indeterminacy and sunspot fluctuations when income tax rates are determined by a balanced-budget rule. This paper introduces in an otherwise standard real business cycle model a more general and data coherent class of production functions, namely a constant elasticity of substitution production function. We show that the degree of substitutability between production factors is a key ingredient to understand the (de)stabilising properties of a balanced-budget rule. Then we calibrate the model consistently with the empirical evidence, id est we set the elasticity of substitution between labour and capital below unity. We show that compared to the Cobb-Douglas case, the likelihood of indeterminacy under a balanced-budget rule is greatly reduced in the United States, the European Union and the United Kingdom. Mode of access: Internet Constant Elasticity Of Substitution imf Fiscal Policy imf Laffer Curve imf Production Function imf WP imf United States imf Rossi, Raffaele. IMF Working Papers; Working Paper ; No. 2014/023 Full text available on IMF http://elibrary.imf.org/view/journals/001/2014/023/001.2014.issue-023-en.xml IMF e-Library