Delayed taxation and macroeconomic stability: A dynamic IS-LM model with memory effects

This study develops a dynamic IS-LM macroeconomic model that incorporates delayed taxation and a memory-dependent income effect, and calibrates it to quarterly data for Romania (2000-2023). Within this framework, fiscal policy lags are modelled using a 'memory' income variable that weights past incomes, an approach grounded in distributed lag theory to capture how historical economic conditions influence current dynamics. The model is analysed both analytically and through numerical simulations. We derive stability conditions and employ bifurcation analysis to explore how the timing of taxation influences macroeconomic equilibrium. The findings reveal that an immediate taxation regime yields a stable adjustment toward a unique equilibrium, consistent with classical IS-LM expectations. In contrast, delayed taxation, where tax revenue depends on past income, can destabilise the system, giving rise to cycles and even chaotic fluctuations for parameter values that would be stable under immediate collection. In particular, delays act as a destabilising force, lowering the threshold of the output-adjustment speed at which oscillations emerge. These results highlight the critical importance of policy timing: prompt fiscal feedback tends to stabilise the economy, whereas lags in fiscal intervention can induce endogenous cycles. The analysis offers policy-relevant insights, suggesting that reducing fiscal response delays or counteracting them with other stabilisation tools is crucial for macroeconomic stability.