Indeterminacy and utility-generating government spending under balanced-budget fiscal policies

We reexamine indeterminacy and utility-generating public spending under balanced- budget rules in a simple one-sector growth model. The introduction of consumption tax (subsidy) as well as subsidies for savings and labor modify indeterminacy con- ditions in the existing studies. We show that if consumption subsidies and income taxes exist, indeterminacy occurs even when private and public consumption are Edgeworth substitutes and public spending and leisure are separable in the utility function. Indeterminacy also occurs even when they are weak Edgeworth comple- ments if consumption tax and subsidies for savings and labor are present. Surpris- ingly, when they are strong Edgeworth complements, the stronger external effects of public consumption tend to lower the possibility of equilibrium indeterminacy in the presence of consumption tax.