Indeterminacy with Progressive Taxation and Sector-Speci c Externalities

This paper quantitatively examines the empirical plausibility of equilibrium indeter-minacy and sunspot-driven cyclical uctuations in a real business cycle model with two distinct production sectors that yield consumption and investment goods, together with separable or non-separable preferences. When calibrated to match the observed progres-sivity of the U.S. federal individual income tax schedule, each version of our model econ-omy exhibits an indeterminate steady state under empirically realistic combinations of the households labor supply elasticity and the degree of productive externalities in the investment goods sector. Therefore, macroeconomic instability due to agentsself-ful\u85lling expectations may in fact be a prevalent feature of the U.S. economy