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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. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
  2. 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.
  3. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Business cycle accounting," Working Papers 625, Federal Reserve Bank of Minneapolis.
  4. Satyajit Chatterjee & Russell W. Cooper & B. Ravikumar, 1993. "Strategic complementarity in business formation: aggregate fluctuations and sunspot equilibria," Working Papers 93-9, Federal Reserve Bank of Philadelphia.
  5. Grandmont Jean-michel, 1985. "Stabilizing competitive business cycles," CEPREMAP Working Papers (Couverture Orange) 8518, CEPREMAP.
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  7. Reichlin, Pietro, 1986. "Equilibrium cycles in an overlapping generations economy with production," Journal of Economic Theory, Elsevier, vol. 40(1), pages 89-102, October.
  8. Robert E. Lucas Jr., 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, vol. 93(1), pages 1-14, March.
  9. Benhabib Jess & Farmer Roger E. A., 1994. "Indeterminacy and Increasing Returns," Journal of Economic Theory, Elsevier, vol. 63(1), pages 19-41, June.
  10. Dos Santos Ferreira, Rodolphe & Dufourt, Frederic, 2006. "Free entry and business cycles under the influence of animal spirits," Journal of Monetary Economics, Elsevier, vol. 53(2), pages 311-328, March.
  11. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
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