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On Stabilization Policy in Sunspot-Driven Oligopolistic Economies

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Abstract

Economies with oligopolistic markets are prone to inefficient sunspot fluctuations triggered by autonomous changes in firms equilibrium conjectures. We show that a well designed taxation-subsidization scheme can eliminate these fluctuations by coordinating firms in each sector on a single efficient equilibrium. At the macroeconomic level, implementing this stabilization policy leads to significant welfare gains, attributable to a quantitatively dominant "efficient stabilization effect". This effect, while important, is typically ignored in the traditional computations of the welfare costs of aggregate fluctuations (e.g., Lucas, 2003).

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Bibliographic Info

Paper provided by Aix-Marseille School of Economics, Marseille, France in its series AMSE Working Papers with number 1337.

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Length: 38 pages
Date of creation: 30 Jun 2013
Date of revision: 30 Jun 2013
Handle: RePEc:aim:wpaimx:1337

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Web page: http://www.amse-aixmarseille.fr/en
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Keywords: Business cycles; Stabilization policy; Indeterminacy; Sunspot equilibria; Oligopolistic competition;

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  1. V.V. Chari & Patrick J. Kehoe & Ellen McGrattan, 2004. "Business Cycle Accounting," NBER Working Papers 10351, National Bureau of Economic Research, Inc.
  2. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  3. Jang-Ting Guo & Kevin Lansing, 1999. "Fiscal policy, increasing returns, and endogenous fluctuations," Working Papers in Applied Economic Theory 99-08, Federal Reserve Bank of San Francisco.
  4. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1995. "Capital utilization and returns to scale," Working Paper Series, Macroeconomic Issues 95-5, Federal Reserve Bank of Chicago.
  5. Benhabib, J. & Farmer, R.E.A, 1991. "Indeterminacy and Increasing Returns," Papers 165, Cambridge - Risk, Information & Quantity Signals.
  6. Rodolphe Dos Santos Ferreira & Frédéric Dufourt, 2007. "Free entry equilibria with positive profits: A unified approach to quantity and price competition games," Post-Print halshs-00796163, HAL.
  7. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
  8. Grandmont Jean-michel, 1985. "Stabilizing competitive business cycles," CEPREMAP Working Papers (Couverture Orange) 8518, CEPREMAP.
  9. Robert E. Lucas Jr., 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, vol. 93(1), pages 1-14, March.
  10. Rodolphe Dos Santos Ferreira & Frederic Dufourt, 2006. "Free entry and business cycles under the influence of animal spirits," Post-Print halshs-00789030, HAL.
  11. Reichlin, Pietro, 1986. "Equilibrium cycles in an overlapping generations economy with production," Journal of Economic Theory, Elsevier, vol. 40(1), pages 89-102, October.
  12. Chatterjee, Satyajit & Cooper, Russell & Ravikumar, B, 1993. "Strategic Complementarity in Business Formation: Aggregate Fluctuations and Sunspot Equilibria," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 795-811, October.
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