Fiscal policy rules in an overlapping generations model with endogenous labour supply

A fiscal policy rule in which taxation is a function of the stock of government debt (a 'wealth tax') is usually believed to be effective in providing stability. Using a discrete-time version of the Blanchard (1985, Debt, deficits and finite horizons. Journal of Political Economy 93, 223-247) overlapping generations model extended to include an endogenous labour supply, we show that, contrary to the conventional wisdom, a wealth tax might not be enough to ensure the existence of a unique, well-defined steady state. We suggest that a government willing to run a positive and sustainable level of debt could use an alternative rule (a 'fiscal Taylor rule'), in which another taxation component, that takes in to account the level of the real interest rate, is added.