Can productive government spending be a source of equilibrium indeterminacy?

This paper presents an examination of the interaction between indeterminacy and productive government spending financed by taxes in a one-sector growth model. In the paper, we show that the possibility of indeterminacy is positively affected by dependence on income tax financing and is negatively affected by consumption tax financing. Under balanced budget rules, a key determinant for indeterminacy is a revenue source for providing public services (i.e. income tax financing) rather than the presence of productive government spending.

Research Highlights► We examine the equilibrium indeterminacy in a dynamic model with productive public goods. ► The presence of public goods financed by income taxes is the source of indeterminacy. ► However, public goods financed by only consumption tax is not the source of indeterminacy. ► The combination of public goods and income tax is key to path-indeterminacy.