Luxury Goods Externalities, Taxation, and Endogenous Business Cycles
MSc thesis 2012
Sole-authored · Católica-Lisbon School of Business and Economics · 2012
Abstract. This thesis aims to analyze aggregate instability due to volatile expectations in a simple two-sector OLG model with money, where agents derive utility from the consumption of necessary and luxury goods and there is an externality affecting the consumption of the later. I show that the distinction between necessary and luxury goods is not relevant for the emergence of indeterminacy, if there is no government intervention and if the externality has no influence. However, externalities, per se, or setting different consumption taxes by type of good, in the absence of externalities, may create local indeterminacy if tax rates are strongly pro-cyclical or counter-cyclical. I further show that consumption taxation can be a stabilizing instrument, by eliminating local indeterminacy, if one of the tax rates is set pro-cyclically (counter-cyclically) for a positive (negative) externality.
Keywords
Endogenous business cycles · Local indeterminacy · Overlapping generations · Consumption externalities · Consumption taxation
Cite (BibTeX)
@mastersthesis{gouveiamendes2012luxury,
author = {Gouveia-Mendes, Ricardo},
title = {Luxury Goods Externalities, Taxation, and Endogenous
Business Cycles},
year = {2012},
school = {Cat\'olica-Lisbon School of Business and Economics}
}