Multiple Steady States under the Balanced Budget Rule- a Generalization

When governments levy taxes on labour income on the basis of a balanced budget rule, this rule causes a nonlinear system.Thus, multiple steady states in an economy exist, which can cause multiple movement patterns in an economy. This article deals with the existence of these multiple steady states. Schmitt-GrohLe and Uribe (1997) discusses this issue, but does not necessarily show the clear existence of steady states. On a more general assumption of increasing marginal disutility of labour, however, we show that there can be two steady states in the economy, one with superior, the other with inferior economic performance.