Stabilizing Endogenous Fluctuations with Fiscal Policies: Global Analysis on Piecewise Continuous Dynamical Systems

This paper considers a one-sector overlapping-generations model with production. We observe that under standard assumptions on preferences and technology, the perfect-foresight equilibrium violates positivity constraints for large sets of initial conditions. The consideration of the positivity constraints of the consumer enables degenerate equilibrium, a perfect-foresight equilibrium that remains in the trivial steady state from a certain time, to be defined. To correct this unsatisfactory situation, we introduce a mechanism redistributing resources among generations by levying taxes.