Abstract
This study investigates the relationship between a government’s fiscal policy tax scheme and equilibrium indeterminacy. We analyze an economy in which the government maintains its budget by levying a consumption tax and uses these funds to provide public goods and services. We reveal that there exists a unique stable path and equilibrium indeterminacy does not arise in this case, even if public consumption is included in the representative agent’s utility function and this utility function is non-separable from public consumption and leisure. The arguments presented in this paper show that consumption tax is able to provide stabilization against fluctuations or sunspot equilibria in an economy, even if public consumption benefits agents’ utility.
