Fiscal Policy Rules in an Overlapping Generations Model with Endogenous Labour Supply¤

A ¯scal policy rule in which taxation is a function of existing government debt (a \wealth-tax") is usually believed to be e®ective in providing stability. Using a discrete-time version of Blanchard's overlapping generations model, extended to in-cludemoney and an endogenous labour supply we show that, contrary to the intuition, a wealth tax might not be enough to ensure the existence of a unique, well de¯ned, saddle-path equilibrium. We suggest that a government willing to run a positive and sustainable level of debt could use an alternative ¯nancing rule, imposing an addi-tional tax component, that is a function of the di®erence between the real interest rate and the tax rate on wealth. ¤I would like to thank Neil Rankin for very valuable comments. I also thank for comments Lei Zhan