Equilibrium Dynamics in a Two-Sector Model with Taxes |
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Authors: | Salvador Ortigueira Manuel S. Santos |
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Affiliation: | a Department of Economics, Cornell University, Ithaca, New York, 14850, f1so37@cornell.eduf1b Department of Economics, Arizona State University, Tempe, Arizona, 85287, f2Manuel.Santos@asu.eduf2 |
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Abstract: | 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. Journal of Economic Literature Classification Numbers: D90, E22. |
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Keywords: | distortionary taxes competitive equilibrium dynamic instability non-interior equilibrium orbit |
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